Journalism in the Public Interest

Overview of the Government’s Programs to Reduce Principal on Underwater Mortgages

The Obama administration has been increasing its support for programs to induce banks and others to trim loan balances for homeowners that owe more than their homes are worth. Here's an overview of the three programs trying to increase the number of underwater borrowers who can get help.

See related story: Fannie and Freddie's Gov't Regulator Opposes Reducing Mortgages for Struggling Homeowners

HAMP Principal Reduction Alternative

An addition to the government's main loan modification program, HAMP-PRA requires banks and others that service mortgages to consider reducing principal for borrowers who owe at least 115 percent of the value of their home, have faced hardship, and have already defaulted or will soon default. Reductions are voluntary and must cost less than a regular HAMP modification or a foreclosure. Bank of America and Wells Fargo have both agreed to participate for loans they own in their own portfolios.

Hardest Hit Fund

Several states that have seen significant housing price declines announced principal reductions as part of Treasury's Hardest Hit Fund program. California, Nevada and Arizona are the largest states that require the lender to match dollar for dollar any money the states spend to reduce the principal. The state programs typically have a number of eligibility limitations, including that borrowers must be behind on their payments and have faced a documented hardship. So far only Bank of America has agreed to participate for loans that it owns in its own portfolios.

FHA Short-Refinance

In September, Treasury and HUD launched a refinance program through the Federal Housing Administration, a federal agency that insures mortgages, that allows borrowers who are current but underwater to refinance into a new, smaller loan. Lenders must agree to erase at least 10 percent of the outstanding principal.

Are these all voluntary, as HAMP and HARP were?
In other words, is this just some puffery that makes it look like “more” help for homeowners, while the banks stay in track to steal 14 million homes?
Any teeth to any of this?


Dec. 17, 2010, 4:37 p.m.

Stary of course there is no teeth to this, The whole country is a the mercy of Banks
And heres a quote form Thomas Jefferson since 1802 he knew!

“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”
– Thomas Jefferson, Letter to Treasury Secretary Albert Gallatin (1802)

Donald Moritz

Dec. 17, 2010, 6:36 p.m.

The above quote attributed to Jefferson is labeled “FALSE” by Snopes.

Here is another quote from Thomas Jefferson referring to a small rebellion in one one of the states:

“God forbid we should ever be twenty years without such a rebellion.  ... What country before ever existed a century and half without a rebellion? And what country can preserve its liberties if their rulers are not warned from time to time that their people preserve the spirit of resistance? Let them take arms. .... What signify a few lives lost in a century or two? The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. It is its natural manure.”

It’s simply unbelievable that our government has not taken any legitimate action to help homeowners, as they did in the 1930’s keeping millions of Americans in their homes.

Perhaps, in the end, the only solution to this mess, will be for a few to rise up in rebellion and spill some blood?  What a shame!

Read the Congressional Oversight Panel’s December report, “A Review of Treasury’s Foreclosure Prevention Programs”, pages 111-122, to see how the governments Home Owner’s Loan Corporation REALLY helped homeowners… for one simple reason… that was it’s REAL intent!

This quote is from another article about Fannie and Freddie on this site.  This pretty much sums up the double-speak consistently going on.

“Wells Fargo and Bank of America, for example, have both agreed to consider principal reductions in the Treasury’s main loan modification program, but only for loans that they own outright.”

Is this SERIOUS?  Isn’t part of the problem that many of these mortgages have been split-up and sold piece meal?  So, if we look behind the above statement what we’re really hearing is: There will be nothing we can or will do.

And they don’t have to do anything because they are not being FORCED to do anything.

In regard to principle reduction; a report came out the other day from Fitch Rating

“The loss severity, or the percentage of principal lost when a loan is foreclosed, on prime mortgage loans is currently at 44%. This, according to Fitch, will increase to between 49% and 54% in 2011. For Alt-A loans, the current 59% loss severity should increase to between 64% and 69%.

Currently, the loss severity on subprime loans is 75%, but Fitch predicts it will increase to 80% and 85% by the next year”.

It makes no financial sense not to modify including some principle reduction. There is something else going on….

Steve-I’m not the sharpest tool in the shed when it comes to these matters…but as I understand, the banks not only are able to write off these losses, but are compensated by FDIC for somewhere around 80-85% of the original loans value. They then can sell the propery and THEN go after the homeowner for any remaining balance. If this is true (whether some or all of it), it is no wonder that the servicer’s are not granting either modifications or short sales. They string the distressed homeowner out and eventually foreclose because this is where THEY make the most money.


Dec. 18, 2010, 10:50 p.m.

Steve, here is what is going on..
A traditional mortgage lender decides whether to foreclose or restructure a defaulted loan based on its evaluation of the comparative net present value of those options. Most residential mortgage loans, however, are securitized. Securitized mortgage loans are managed by third-party mortgage servicers as agents for mortgage-backed securities (“MBS”) investors.
Servicers‘ compensation structures create a principal-agent conflict between them and MBS investors. Servicers have no stake in the performance of mortgage loans, so they do not share investors‘ interest in maximizing the net present value of the loan. Instead, servicers‘ decision of whether to foreclose or modify a loan is based on their own cost and income structure, which is skewed toward foreclosure. The costs of this principal-agent conflict are thus externalized directly on homeowners and indirectly on communities and the housing market as a whole.
As a result, servicers are frequently incentivized to foreclose on defaulted loans rather than restructure the loan, even when the restructuring would be in the investors‘  interest. The costs of this principal-agent conflict are not borne solely by MBS investors. The principal-agent conflict in residential mortgage servicing also has an enormous negative externality for homeowners, communities, and the housing market.

Roy, hope you are feeling well. You are talking about the PIPP program with FDIC - that share lost agreement is only with institutions that the FDIC have taken over and a investor has purchased the portfolio - ie One West Bank purchase of Indy.

acmodspecialist; you have a good understanding however there is still something deeper. I make that assumption on one factor. The taxpayer owns Fannie and Freddie, Treasury is part of the same structure (US Government). Between all of the GSE’s they account for over 65% of the legacy pools and 95% of the market in 2009 and 2010.  Their dominance of the servicing industry can dictate what should happen yet we still have a mess; why? You both know at what levels I have been involved with, and the proposal put forth yet no action.

There is some reason Treasury and the GSE will not move. We know the investors are bringing suits.  Servicers futures are based on the GSE’s since they are the only game in town for the last two years and the foreseeable future for new business.

From a strictly economic point of view a general recovery can not be supported by just the servicing industry’s profit at the expense of the investor, homeowner and taxpayer. Why will FHFA and Treasury not order Fannie and Freddie to crush the servicers?

I think my speculation is further supported by Kate Berry’s article in American Banker on Friday.  I love the title; “Lender Tie to Borrower Aid How a fox was sent to guard the Hamp house”

Steve-The denial of you and your company to help clean up this mess, is just further proof that those in power have no interest in actually addressing this situation…to the detriment of the average hardworking RESPONSIBLE American. I know that you have to be extremely down and disappointed at this point in time. I pray that you and your associates do not give up the fight…for it is both an honorable and honest endeavor that you propose. One that could help many hundres of thousand people…get our economy back on track (as we know that nothing of any real significance will happen UNTIL the housing issue is addressed, not just swept under a rug and hope it will correct itself). It is also evident that the servicers way of dealing with things is not going to benefit anyone but themselves. I know the past two years have been rough for you…I do hope you are able to enjoy the Holidays and refresh and regroup, as we homeowners need good people like yourself to be involved. Shoulder replacement went well (amazing what they are able to do these days) and I am working very hard with rehab so I can return to work and pay for this underwater property I consider HOME. GOD bless you and yours!

Whether the banks can/can’t reduce principal amounts on loans may not be the question.  Why should the homeowners who can’t afford their mortgage payments be rewarded with a reduced loan amount?  What happens to the vast majority of Americans who are making their mortgage payments, even when they are underwater, and now, being asked to pay (through their taxes) so that others may get their loans reduced?  Won’t that just be an incentive to start defaulting on their loans to get the same benefits?

Is this how we are supposed to go forward - borrow, borrow, borrow and then when you can’t pay it back, get the people you borrowed the money from to reduce the amount you owe them?  What business is going to want to lend money going forward?  We have fairly easy access to capital and credit in this country that has made it easier for everyone to pursue the American dream.  Are we really saying that we should sacrifice that and return back to the days when only the REALLY wealthy could get the loans they were looking for?

Joe, if I may answer your concerns. The reason we need a modification effort with or without principle reduction is to protect the 9 out of 10 people that are paying their mortgage.  The strategy is to reduce below market inventory - it is a supply and demand issue.  As hard as it may be to believe but stabilizing values is suppose to be the main objective.

In regard to your second point you may be putting the chart before the horse.  The lending industry offered products to customers that could not afford them.  Historically it is the lender that decides risk - not the borrower. This was the industries choice. What got us in this mess was poor underwriting to determine risk and the desire of the lending industry to make profits from origination.  They sold an inferior product, got the credit rating industry to say it was good and they walked away and left the investor and homeowner holding the bag. This fact is not up to debate.

If a person sold a car to a buyer, and the seller knew the engine would go in one year but did not care because the buyer borrowed money from someone else - who do you think is at fault? The seller told the buyer it was a great car.  The buyer believed the seller since he knows what he is talking about. This analogy is not far from what took place in the Real Estate industry.

You also have to separate lenders and investors, they are two different players. Lenders will lend again when they have confidence in the risk analysis of the product.

Finally - look at the third quarter earnings of the majority of the major backs - huge.

Roy, thank you for the kind words. I am frustrated but AAHMP will not give up - it is too important.

Keep working that shoulder.


Dec. 20, 2010, 11:13 p.m.

Mr.Joe from Today, 10:11 a.m.
I would advise that before you write such ignorant comment get informed, So I am going to recommend you a few sources of information on top of swarmthebanks and “parallelforeclosure”, 4clouserfraud”, Foreclosure hamlet websites, to go see the movie documentary “inside Job” go to   read the books 13 Bankers by Simon Johnson and All the Devils Are Here, by Bethany McLean and Joe Nocera and all of the following books
fterShock, Robert Reich
The Big Short, Michael Lewis
Crisis Economics, Roubini
The End of Wall Street, Lowenstein
The Forgotten Man, Amity Shlaes
FreeFall, Joe Stiglitz
The Great American Stick-Up, Robert Sheer
The Great Depression Diary, Benjamin Roth
The HellHound of Wall Street, Michael Perino
On the Brink, Henry J. Paulson
The Quants, Scott Patterson
The Return of Depression Economics, Paul Krugman
Too Big To Fail, Andrew Ross Sorkin
Griftopia, Matt Tiabbi
Last but not least read all the documentaries and reports (old and new) that appear here on Propublica with statistics dates, accurate numbers etc. After you do all this please write again here I would like to read your comments again once you are well inform


Dec. 20, 2010, 11:20 p.m.

I would like to congratulate 2 people that sometimes write here their comments on top of Propublica for their information fighting and knowledge:
Steve form AAHP and Martin Andelman

Cancel all these programs. They don’t, won’t and can’t work.

Instead, have the Fed Gov buy the properties once they have defaulted and been foreclosed, typically for pennies on the dollar. Then they can sell the properties, at the current market price, to whoever wants them, including the original owner. Call it a housing program. The Feds would make money, the homeowners would get their houses back at an adjusted market price, and the banks would take it in the neck as they rightly should.

Or the banks might wake up and deal honestly with homeowners to avoid defaults in the first place. Yeah, right. As if.

Banksters will never be honest to their costumers. They have the obligation to their stock holders. This is why they screw you and me out of our last penny.

When the first time banks offered a modified payment to people, if those lowered modified payments would of been honored we would not be in this mess. I know. After one year of trial payment Chase decided to triple my trial plan if I want to keep our home.

I Wonder why the lowered modified payment was not good enough for the banks from over 1 million people?

If the banks would aggree to lower the principles, and or honor the original trial plans that many people entered
with good faith we would not look for 14 million homes to be foreclosed by the year 2012. If each home has just three member, we are looking at 52 million men women and children abused by the banks. If this is not financial terrorism I don’t know what is.

But Come on 52 million Americans screwed by banks and the government doesn’t have the B..LLs to demand banks to do something to help families?

What kind of world are we living in here? Exploitation by those who make 50-100 million dollar salaries/year?

I wonder if the government would not gave the bail out when it did.
Do you think Blankfein from goldman sucks could of received his $ 67.5 million salary in 2009?

I did not think so. These people are getting these salaries by ripping off the American working class.


Dec. 23, 2010, 2:37 a.m.

Mark Twain

I apply at Bank of America foe loan modification on 8/2010 All paper complet in 10/10 still I got answer you have to wait for another 90 days. I do not know what can I do.

DP-As someone who has been through (and am still) the gauntlet with BoA concerning an answer in regards of a modification via HAMP, I can only tell you to stay on top of the situation…take extremely specific notes of all correspondence (write down dates, time, employee ID#‘s and what was requested and what you were told) and call every other day if you have to. I have been in this nightmare since April 4, 2010 (when BoA 1st stated they had all the needed docs) and I am still yet to receive an answer (this, after being in the office of the President and CEO of the Advocacy dept. since Sep. of 2010). You might write your elected officials and the OCC (office of the comptroller of the currency). I would suggest you read ALL the articles here in ProPublica concerning loan mods (along with the comments) so you might see exactly what you are facing. I would also reccommend you join the website as there are many knowledgeable and helpful people who might answer your specific questions. I also know another gentleman who I might refer you to if necessary. Not to discourage you…but you are most definitely facing an uphill battle…one you should only pursue if you have an honest heart and need. You will also need patience and much tenacity…I wish you all the best. GOD bless all!

In a twisted sort of way, this is funny:

It’s funny because it talks about SLOWING DOWN.  How SLOW can you go?  The tortoise was a speed freak in relationship to the speed (?) of foreclosure modification NON PROCESS

This article is part of an ongoing investigation:
Foreclosure Crisis

Foreclosure Crisis: Banks and Government Fail Homeowners

Banks and the government have fallen short in helping homeowners in danger of foreclosure.

The Story So Far

Systemic failures at the country’s banks and mortgage servicers have exacerbated the most severe foreclosure crisis since the Great Depression, and government efforts to limit the damage have fallen short. ProPublica created an unrivaled database of homeowners who have faced foreclosure, opened a Facebook page to encourage homeowners to share their stories, wrote profiles of some of them, and incorporated their experiences into our reporting. We also provided a comprehensive rundown of the numbers behind the crisis.

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