Principal Reduction Alternative For Underwater Homeowners


The average person can hold his or her breath for about two minutes. But with oxygen in short supply, carbon dioxide levels rapidly begin to build. This eventually triggers spasms of the breathing muscles, causing inhalation and if underwater, drowning. According to CNNMoney11.1 million Americans were in an analogous position financially at the end of 2011—holding their breath in an underwater mortgage, waiting for the reflex action that will cause them to drown.

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From Bad To Worse

Few options are available for these distressed families. Many cannot refinance without contributing hard-earned savings to cover the difference between what they owe, and what an appraisal says their home is worth. Few have the funds required. Some homeowners may qualify for a government-sponsored refinance program. Unfortunately, though, most are one unexpected emergency—job loss, accident, natural disaster or serious illness—away from short sale or foreclosure. Sadly, many are already there. RealtyTrac reported that nearly 192,000 properties received foreclosure filings in July 2012 alone.

Enter The Principal Reduction Alternative

A component of Making Home Affordable, an initiative of the Obama Administration and joint program of the Department of the Treasury and the Department of Housing and Urban Development, the Principal Reduction Alternative (PRA) may represent the tank of oxygen that homeowners need. Designed to encourage mortgage servicers and investors to reduce the amount owed on homes, the PRA has enabled countless families to prevent foreclosure, and retain their properties. How does the administration “encourage” servicers and investors? By offering an incentive in exchange for their cooperation in the program. For every dollar that banks, investors, and other buyers of mortgage-backed securities agree to write-off, they’ll receive as much as $0.63 from the Treasury. That’s an attractive alternative to the costly foreclosure process and eventual sale of properties at distressed prices.


To be eligible for a principal reduction under PRA, the mortgage should have been originated on or before January 1, 2009, and your home must be a primary residence, not owned or guaranteed by Fannie Mae or Freddie Mac. You must owe more than your home is worth, with payments that are more than 31 percent of your monthly pre-tax income. If your balance on the first mortgage is more than $729,750, you’ll be ineligible. Homeowners interested in a principal reduction must be delinquent on their loans, or suffering a financial hardship that leaves them in danger of falling behind on their mortgage payments. You must also have sufficient, documented income to support a modified payment, and a record without felony convictions within the last 10 years.

SEE ALSO: Changing Jobs? It May Kill Your Mortgage Chances

Options And Success

More than 100 mortgage servicers currently participate in the Home Affordable Modification Program (HAMP), and can evaluate a homeowner’s eligibility for a PRA principal reduction. These include Bank of America, CitiMortgage, JP Morgan Chase and Wells Fargo. Principal reductions have been extremely successful in enabling borrowers to stay current on their payments and retain ownership of their homes. Only 12 percent of homeowners who were the beneficiaries of principal reductions in 2011 re-defaulted. Only 23 percent of borrowers who received interest rate reduction modifications fell behind on their loans, and 30 percent who received forbearances eventually defaulted and lost their homes. If you’d like to explore your PRA options, call the Making Home Affordable hotline at 888-995-HOPE, and breathe easy again.
Date of original publication:
Updated on: November 10, 2015

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