Do upside down mortgage holders have another option besides short sales? Are there any other options for upside down mortgage holders besides short sales? There answer is now yes. A new program known as a Principal Balance Reduction is being offered to upside down homeowners that meet a few basic qualifications. As long as the mortgage(s) is worth at least 25% more than the value of the property and the applicant can document a debt-to-income ratio of 50% or less (based on the new, lower monthly mortgage payment) the negative equity can be completely eliminated through a Principal Balance Reduction program. A Principal Balance Reduction program is essentially a large scale Note purchase program consisting of heavily upside down homeowners, some current on their payments and others that have already stopped making their mortgage payments. Due to the fact that property owners who owe more than their property is worth are very likely to default in the not so distant future, the Notes are sold to the new buyer (in this case a $5 Billion dollar hedge-fund) at a steep discount to current market value. The new owner of the Notes, the hedge-fund, then turns around and changes a couple of terms of the existing Note they just acquired.
The oustanding mortgage balance is reduced to 95% of current market value and the interest rate is changed, to either 6.25% or 7.25% depending on the homeowners credit score. The once upside down homeowner now has a permanent principal reduction often amounting to hundreds of thousands of dollars in savings and the hedge-fund makes a quick profit and turns around and repeats the process with new clients. Are short sales a thing of the past? Possibly. If a homeowner qualifies for the program, why just walk away from the property and let someone else get a great deal. Also, short sales have negative tax implications and don't do your credit any good. A Principal Balance Reduction program allows the homeowner to essentially short sell the property to themselves without the negative tax implications or ruining their credit rating. The hedge fund has a very high success rate at purchasing these Notes at a substantial discount to market value. The portfolios presented to the lender, often consisting of over 100 properties, are all upside down by at least 25%. These are toxic assets that if haven't soured yet and going to at an alarming rate in the coming months.
The banks know that homeowners with no equity and especially those so upside down as the participants in this type of program are very quick to hand the keys back to them if the slightest financial challenge comes their way. Rather than wait a year or two and have to go through the expense of a foreclosure only to end up with what they are being offered now to take this entire lot of souring “assets” off their books, the banks are understandably jumping at the opportunity. There is a nominal fee to participate in the program and it is paid after the homeowner has been prequalified and is submitted with the complete package of supporting documentation. In California, there are absolutely no upfront fees to participate in a Principal Balance Reduction program. Once the word gets out that a program like this even exists, the flood gates will open with homeowners rushing to shave hundreds of thousands of dollars in negative equity permanently from their mortgage balance. If you would like more information about a Principal Balance Reduction program, and request a free consultation with a Principal Reduction Specialist.