According to a new report from the State Foreclosure Prevention Working Group, a group of state attorney generals and bank supervisors across the country, loan modifications made in 2009 are forty to fifty percent less likely to be delinquent six months after modification than loans modified at the same time in 2008. Additionally, the report states that loan modifications which include a principal reduction have a lower rate of re-default. While the report recommends principal reductions due to the improved long-term success of the loan modification, principal reductions have been rare to this point. According to the report, only one in five modifications reduces principal. Moreover, the report shows that seventy percent of loan modifications actually increase the amount of principal owed due to the addition of penalties, fees, and late payments. The Home Affordable Modification Program (HAMP) provides for principal reductions as an alternative to its waterfall modification. However, due to the fact that government sponsored entity (GSE) loans are not eligible for principal reductions and reductions are optional, it is unlikely the principal reduction alternative to HAMP will have much impact.
Joshua D. Carlson, Esq.