Loan Forgiveness Through The Principal Reduction Alternative
As of June 1, 2012, the information in this article may no longer be accurate due to changes in the Home Affordable Modification Program. For updated information, please view our article regarding new HAMP eligibility requirements
In response to the many homeowners today seeking help with their mortgage payments, we’ve already launched a full-fledged effort to implement loan modifications through the Home Affordable Modification Program (HAMP). Now additional relief is also available through a new initiative known as the Principal Reduction Alternative (PRA).
We’re proud to be one of the first large mortgage servicers across the country to implement PRA, which forgives a portion of a borrower’s loan if they remain in good standing with their HAMP modification. This is just one of several important workout programs we use to provide payment relief to our customers in need of financial assistance.
What is HAMP?
HAMP is a program designed by the Department of the Treasury to help eligible homeowners who are struggling financially to avoid foreclosure by modifying their loans. Under HAMP, a mortgage servicer, like IndyMac Mortgage Services, will take steps to reduce a borrower’s monthly mortgage payment so that it equals 31% of their total pretax (gross) monthly income. Borrowers who meet all eligibility requirements for HAMP will first be awarded a Trial Period Modification, in which they will receive an offer to make reduced mortgage payments for a three month period. During this time, borrowers are reviewed for eligibility for a permanent loan modification. If a borrower’s financial information and eligibility remain the same and they fulfill their obligations under the Trial Period Plan, they will be awarded a permanent loan modification under HAMP.
To learn more about HAMP please click here.
Who is HAMP for?
HAMP is designed for borrowers who have experienced financial hardship. Not all borrowers will qualify for HAMP and eligibility is based on meeting specific criteria including (but not limited to):
- The borrower(s) have experienced a financial hardship.
- The borrower(s) is delinquent on their mortgage.
- The borrower(s) can fully document their income and hardship by providing a signed IRS form 4506-T, two most recent pay stubs (four paystubs if paid weekly), most recent tax return, and a signed affidavit of financial hardship.
- The borrower(s) existing mortgage payment (including mortgage principal, interest, taxes and insurance) is greater than 31% of their gross monthly income.
What is PRA?
In a very basic sense, PRA is a way to give additional relief to homeowners experiencing financial hardship.
When we modify a loan through HAMP, we reduce the mortgage payment so that it equals 31% of the borrower’s monthly gross income by taking certain steps. These include lowering the interest rate on the loan, extending the loan (i.e. making the date the final payment is due further out in time), and using principal forbearance (i.e. setting aside a portion of the mortgage that does not require monthly payment or accrue interest) which becomes due, interest-free, when you pay off the loan, refinance, sell your home, or reach the maturity date of the loan.
The PRA program adds additional relief by permanently reducing the balance of the loan to a point where the amount of the loan is only slightly higher than the value of the property. With principal forgiveness, the reduced portion (the principal reduction amount) of the loan is permanently removed from the total debt owed on the loan, and the borrower is never required to pay it back as long as they remain in good standing.
How do I qualify for PRA?
You must first be eligible for a loan modification under HAMP to be considered for principal reduction as outlined in the PRA program. Here are the additional requirements:
- You can document and provide proof of your financial hardship.
- Your loan is owned by an investor that allows for this principal reduction modification.
- Your loan is 60 or more days delinquent.
- Your mortgage payments are greater than 31% of your gross monthly income, and you can document this.
- Your current loan to value (LTV) ratio is greater than 115%.
- You have submitted your HAMP application on or after October 1, 2010.
How is PRA applied to a loan?
If a borrower is eligible for PRA, makes timely payments on their HAMP trial modification, and stays in good standing, one-third of the deferred amount will be forgiven on each one-year anniversary of their first trial modification payment until the entire amount is forgiven. If a borrower terminates or pays off the loan before three years have passed and makes timely payments on their HAMP trial modification, the entire forbearance amount will be immediately forgiven upon pay off. Below is an example of how PRA is applied to a loan when a borrower remains in good standing:
Borrower A has a principal loan amount of $200,000 and a property value of $150,000. Through HAMP and PRA, Borrower A would be eligible for a principal forgiveness of $27,500 if they make payments as agreed under their modification plan. Through PRA, the borrower’s loan will be reduced to $172,500 and their mark to market loan-to-value ratio will be reduced from 133.3% to 115%. As long as Borrower A is never behind more than two payments (remains in good standing) on each of the first three anniversaries of their modification, they will earn and be awarded 1/3rd of the $27,500 ($9,167) on each of the first three (3) anniversary dates of their first trial payment. This amount is permanently forgiven and Borrower A will not be required to pay this amount back once it is forgiven. Borrower A will receive a 1099 at the end of each year in which they receive forgiven principal. Borrowers who are awarded with PRA should consult a tax advisor for any potential tax implications related to the principal forgiveness.
What does it mean to be in “good standing?”
Good standing means that a borrower has not been more than 60 days delinquent (i.e. more than sixty days late in making a payment due at a specific date), at any time since he or she started a modification. In order to be eligible to receive the principal forgiveness portion of the modification, a borrower must remain in good standing on the one year anniversary date of the first trial payment for three consecutive years. If a borrower does not remain in good standing he or she will not receive any reduction in principal that has not already been forgiven up through the previous year’s anniversary. If a borrower who is in good standing becomes more than 60 days delinquent at any time in the first three years following the first trial modification payment, the borrower will immediately become ineligible for any forgiveness that has not been awarded, lose their good standing status, and no longer be eligible for any additional forgiveness per the terms of PRA.
What is the Anniversary Date?
The Anniversary Date is one year from the date of their first trial modification payment. A borrower in good standing will have one-third of his or her principal forgiven on each of the first three anniversary dates.
Is interest charged on PRA amounts before forgiveness is earned?
No. The portion of the loan that is eligible for forgiveness will not bear interest and it is treated as a deferred amount until the forgiveness is earned. During the time in which the principal is deferred, it is set aside into a non-interest bearing account and the borrower is not required to make principal repayments on this amount during this time. Once the borrower earns forgiveness by remaining in good standing, the deferred amount will be forgiven in equal installments following each respective one year anniversary date following the borrower’s first trial payment for the first three years of the modification.
When is principal not forgiven through HAMP?
A borrower who does not qualify for a HAMP modification is not eligible for principal reduction. Borrowers who are eligible for HAMP but whose loan to value ratio is equal to or less than 115% are also not eligible for principal reduction. Additionally, if a borrower does not remain in good standing during the first three years of the modified loan, he or she will not receive any reduction in principal that has not already been forgiven up through the previous year’s anniversary.
If my loan is not eligible for PRA, what happens to my principal forbearance?
Again, not all HAMP eligible borrowers will receive PRA. If you do not receive a principal reduction but have had a portion of your principal balance deferred, this amount will become due at the end of your loan term or if you sell your home or refinance your loan. This amount will be held in a non-interest bearing account, so you will not make any payments prior to the payoff of your loan and will not pay anything more than the deferred amount at the time of payoff.
I have already received a HAMP loan modification – am I eligible for PRA?
Borrowers who applied for HAMP before October 1, 2010, are not eligible for PRA at this time. However, we expect the Department of the Treasury to issue guidance relating to principal reduction eligibility for borrowers in a HAMP trial period plan or permanent HAMP modification made prior to October 1, 2010 in the upcoming months. Please continue to visit our Blog for updates regarding this program.
Apply for HAMP and PRA
If you think you might be a good candidate for HAMP and PRA, you can apply for HAMP by completing our online application. Applying for HAMP is the first step in determining if you qualify for a loan modification and PRA.
Apply Online Print Application
Have questions? Call IndyMac Mortgage Services today at 1.800.781.7399.
Disclosures: Not all borrowers will qualify for a loan modification. Currently, our modification programs are limited to owner-occupied properties. IndyMac Mortgage Services is a debt collector and any information obtained will be used for that purpose. However, this notice does not imply that we are attempting to collect money from anyone who has filed a bankruptcy petition and there is either an “automatic stay” in effect in the bankruptcy case, or whose debt has been discharged pursuant to the bankruptcy laws of the United States.
Click here to read important disclosures regarding HAMP.