There are two types of home retention efforts reported, repayment plans and modifications. Repayment plans help a borrower catch up, and often result in higher monthly payments. Modifications change the terms of the loan and usually result in lower monthly payments. Right now, the government's Home Affordable Modification Program is still in its three-month trial period, so loans being modified under the plan are being lumped in the Repayment bin, despite the fact that it requires lenders to lower monthly payments. When HAMP loans pass their three-month trial, they then become Modifications and will leave the Repayment bin and go into the Modification bin. The report shows that in Q2 Repayment plans rose by 74 percent from the previous quarter and Modifications fell 25 percent. Why? Because all the banks are now doing HAMP.
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Now, I know you're asking, what about the HAMP program, where lenders could write down principal if they want? Well I called a certain government official about this on background, and here's what he said: Yes, lenders can, although they are never required to, write down principal. But the way HAMP works is through a "waterfall" kind of system: First the lender looks at the loan, capitalizes any past due interest, fees, etc. and starts at the top. 1) reduce interest rate as low as 2 percent, 2) extend the maturity of the loan up to 40 years, 3) take a portion of the principal and defer (not forgive) it as a non-interest-bearing balloon. If that doesn't get to the 31 percent debt-to-income ratio, then the lender can, again only if they want, write down principal.
Lenders Reduce Principal? Not So Fast - Realty Check with Diana Olick - CNBC.com
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