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Diane Gallagher

Many underwater homeowners can be thankful for principal relief this year

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Posted: Friday, November 16, 2012 10:19 am

With Thanksgiving next week, there truly is so much to be thankful for. Please take this time and remember to thank the people around you every day, and be thankful for the many blessings that have come your way.

Principal relief for stressed homeowners! A limited number of underwater homeowners in California will soon be able to get principal reductions of up to $100,000 apiece on Fannie Mae and Freddie Mac loans through the federally funded Keep Your Home California program.

Although the federal agency that oversees Fannie and Freddie had previously refused to allow permanent principal reduction on loans they own or guarantee, in mid-September, the Federal Housing Finance Agency told servicers they could immediately begin accepting money for principal reductions from programs financed by the U.S. Treasury’s Hardest Hit Fund, including Keep Your Home California.

The California Housing Finance Agency set up four programs under the Keep Your Home name to distribute California’s Share of the funds — $1.9 billion. It allocated $772 million to principal reduction — enough to help an estimated 9,000 borrowers.

To qualify for the principal reduction in California, homeowners must live in the home, owe more than it is worth, be of low-to-moderate income, and be delinquent or have some hardship that puts them in imminent risk of default.

The balance on the first mortgage cannot exceed $729,750. Other rules apply, but there is no asset limitation. The maximum reduction is $100,000 per homeowner. For eligible homeowners, the program will reduce mortgage payments to less than 38 percent of household income by reducing principal to between 105 and 140 percent of the home’s value. The goal is to provide a sustainable mortgage payment, not to provide

instant equity. For that reason, the principal reduction is structured as a loan that is forgiven after five years.

The five year plan goes something like this. If a homeowner gets $100,000 in principal reduction and within five years sells the home for a profit or refinances and takes cash out, the profit or cash-out — up to $100,000 — must be used to repay the loan. After five years, there is no repayment requirement. Under the original rules, servicers had to reduce principal by $1 for every $1 in principal reduction provided by the program, but few write-downs got done.

In May, the program eliminated the matching requirement and since then more servicers have taken part. To date, 2,511 homeowners have received principal reductions totaling $185.6 million — or roughly $74,000 apiece. Fannie and Freddie say the elimination of the matching requirement allowed them to participate in the principal reduction program, but servicers are still gearing up to accept the payment. For more detailed information on the Keep Your Home programs, visit

Diane Gallagher is the president of the Lodi Association of Realtors and can be reached at