Beginning much less than a year ago a organization in Scottsdale, Arizona backed by a $50 Billion hedge fund has started providing underwater home owners a permanent answer to their nightmare of damaging equity. Providing a Principal Reduction Plan which essentially is really a big scale Note Purchase plan on the secondary market. The Principal Reduction Plan permits a home owner who is at least 25% upside down on their
mortgage and has documented income which supports a debt-to-income ratio of 50% or much less (based on the new lower monthly
mortgage payment) to permanently eliminate their damaging equity for a one-time fee of $1,595. This includes closing costs, attorney fees, appraisals, and even the new loan. The Principal Reduction Plan takes approximately 60-90 days to complete and the home owner ends up with a new loan at 90% of current market worth. All damaging equity is permanently eliminated and the home owner realizes an instant 10% equity position at the end from the procedure. Sound too good to become true? When I first heard about it, I was as skeptical as you.
Here's how it works. Notes from upside down home owners are grouped together in portfolios from around the country for a big scale buy from the current lender. These portfolios of upside down mortgages are negotiated and bought on the secondary market by the hedge fund at a steep discount to current market worth. The hedge fund, now the new owner from the Note, immediately reduces the outstanding loan balance to 90% of market worth and sells it off to an investor. The original lenders, frequently big nationwide banks, are reimbursed for 80% from the balance reduction amount by TARP funds and permanently remove a big group of potentially toxic assets from their balance sheets. The original lender realizes a big cash infusion and removes the high risk of these assets entering the costly foreclosure procedure in the future. It may sound too good to become true but in addition to removing all of their damaging equity, the once upside down home owner doesn't have any damaging impact on their credit rating after completing the Principal Reduction Plan. The old loan is noted on the home owners credit report as “$ balance: paid in full”. The interest rate charged on the new loan is really a 30-year fixed that is slightly above current market rates ranging from 6.25% to 7.25% depending on the home owners credit score when entering the plan. Even with this slightly greater interest rate, the monthly payments are nearly always slashed due to the substantial reduction in principal, frequently several hundred thousand dollars that is permanently eliminated from their outstanding mortgage balance.
