PRINCIPAL REDUCTION

What is a Principal Reduction Program (PRP)?

Principal Reduction Program (Often referred to as "PRP" or “Principal Reduction Loan”) is a program designed to help people who owe more than their house is worth. It’s a “Property Relief” program for people that are “upside down” in their mortgage (negative equity), meaning the property is worth less than their current mortgage.

Through the Principal Reduction Program, we work with a federally-sponsored company to purchase your current mortgage at a discounted rate in order to replace it with a new, better mortgage. The PRP offers you the following benefits:

* A new mortgage with a principal balance set at the current market value of your home
* A fixed interest rate of prime + 3% for the 30 year term of your loan (currently, at 6.25%!)
* Any loan amount qualifies
* Primary and secondary residences can enter the program
* Will accept first and second mortgages, along with HELOCs
* Credit reporting of your current mortgage as "payment in full"
* No closing costs associated with your new loan.


A Principal Reduction Program works to lower the principal mortgage amount on your home to match the true current value.

But, why would your bank agree to a PRP? Because your bank can now utilize U.S. Government TARP funds (Troubled Asset Relief Program) to help recoup their losses after agreeing to reduce a homeowner’s mortgage amount. The Troubled Asset Relief Program (TARP) is a program of the United States created to purchase assets and equity from financial institutions to strengthen the financial sector; it is the largest component of the government's measures in 2008 to address the subprime mortgage crisis.

A PRP is similar to the popular “Cash for Clunkers” automobile program in the sense that it was designed to help boost the economy by introducing new money into the private sector. Through the Principle Reduction Program your current lender is being reimbursed for 80% of their loss from TARP funds. They can write off the rest and take what would have likely become a problem loan off the books. This improves their balance sheet, gives them new money to lend, and will eventually increase their stock price.

For example (see below), you may have a mortgage for $300,000 on a home worth only $200,000, and the monthly payment is $2102. A successful PRP would reduce the mortgage to $200,000, exactly what the home is worth, as well as lower your monthly payment to $1630!




Value of Home Principal Balance Interest Rate Monthly Payment
Current Loan $200,000 $300,000 5.5% $2102
New Loan $200,000 $200,000! 6.25% $1630

The current mortgage is paid off through principal reduction negotiations with your current lender, and a new mortgage is written at prime plus 3% for a new 30-year fixed note (currently, this would be 6.25% fixed). The Principal Reduction Program doesn’t have any negative effect on one’s credit rating as it will show the existing mortgage as paid off in full. The resulting new loan from the PRP is 100% LTV (loan to value) of the current fair market value of what the property is truly worth. There are no closing costs or mortgage insurance! See our PRP F.A.Q. page for complete details!

How Does the Process Work?

The process starts with Atlantic Mutual getting you qualified for the program: gathering all the required documentation, requesting the broker price opinion, and submitting the documentation to Property Relief. They take your paperwork, review it for accuracy, and make sure that all of the qualifications are met. After a preliminary review, your file is submitted to the lender’s attorney group for review.

Once you have been qualified for the program, your file is added to the "bucket" of files for your current lender. Once the bucket is full, they present the group of files to as one package. This can take anywhere from a few days to a couple of months, depending on the lender holding your mortgage.

Our group begins bargaining with the lender to purchase the loans, including yours and works with the lender to get access to TARP funds. Your lender must submit a formal request to the Federal Government for the TARP funds to reimburse them for 80% of the amount they are giving up in reducing your principal. Once they are notified that the funds have been secured, your lender can agree to the lower payoff amount.

Your new lender now has the servicing rights to your loan and can finance a new loan at current market value for you. To do so, a new mortgage is written at the market value, and a closing date is chosen. Normal wait time for a closing is now 30-45 days. While there are no closing costs involved, your new lender still has to do all the normal due diligence involved in writing a mortgage including a title search to make sure there is clean title. See the FAQ page for more complete information.

DEBT MANAGEMENT

A Debt Management program consolidates your bills into one monthly payment while lowering your interest rates. Your debt isn't being eliminated or paid off; instead, your debt is simply being restructured based on guidelines provided by your creditors. Through restructuring your debt, we are able to apply more of each of your payments toward your balance, so that it all doesn't keep getting sucked away month-by-month paying interest only. By paying more toward your balance each month through debt management, you save money and get out of debt an average of three to five times faster!

To help it make more sense: when you pay a creditor $200.00 per month on a $6500.00 balance at a 23% interest rate, approximately $125.00 of that payment is going toward your interest. That means only $75.00 of your payment is going toward your balance! But, when you enter a Debt Management program through a non-profit credit counseling agency, you can make a lower payment to that same creditor and have the payment applied at a lower rate; you will pay off your debt faster and pay less interest in the process.

Your creditors agree to Debt Management programs because your creditors do not wish to sell your account(s) to collection agencies or to have you go bankrupt and no longer retain you as a customer. A credit counseling program gives you an opportunity to pay off your debt to your creditor(s) in a timely manner with manageable payments and reserve your credit.

Our Debt Management program can consolidate credit cards, department store cards, collection accounts, medical bills, gas cards, student loans (for convenience), and any other unsecured debts. Through consolidating your payments, we are able to apply your monthly payment in a systematic manner to quickly pay off debt.

Debt Management has you make the same payment each month, but applies that payment in the most effective way to alleviate your debt. Once an account is paid off, your payment will be applied to your remaining accounts. The non-profit credit counseling agency will determine which account the extra money needs to be applied to, unless you give notice otherwise. In most cases the extra money will go to the account charging the highest interest rate. This process is called an accelerated payment plan, and is designed to get you debt free, faster.

Atlantic Mutual works with National Family Financial Solutions and a network of licensed and bonded 501( c )( 3 ) non-profit consumer credit solutions agencies. Our Debt Management program will help you get out of debt faster, while aiding you in learning to manage your finances for the future.

MORTGAGE ACCELERATOR

A Mortgage Accelerator (often referred to as an "M.A." or bi-weekly payment plan) is a program that allows you to pay off your home mortgage five to ten years earlier than the term of your mortgage. The M.A. changes your monthly mortgage payment schedule into bi-weekly payments. Through the bi-weekly schedule, a Mortgage Accelerator allows you to pay a little extra each month toward your principal balance. These little extras add up to a full additional payment toward your mortgage annually while helping to reduce the amount and term of your loan.
Additionally, a Mortgage Accelerator costs nothing out of pocket! All costs for the program are absorbed into your savings, including:
• A shorter term mortgage
• A lower effective interest rate
• Convenient, automatic payments
Our bi-weekly M.A. program is a systematic way to help you consistently make payments to the principal balance on your loan; and, our services are compatible with any loan and any lender.
There are several schedules that you can choose from when entering a Mortgage Accelerator. All payments are made on the bi-weekly schedule of your choice; payments are timed to coincide with payroll deposits for easier budgeting.
When designing your M.A. schedule, you can choose a specific date to have your loan paid off. Using a target date to pay off your loan allows you to prepare for large costs that may arise in the future. Most of our clients utilize these dates to help plan for their children’s college tuition or prepare for retirement.
The key benefit of a Mortgage Accelerator is substantial savings. Through the use of creative financial programs developed by Avalon, we accelerate the loan payment. As a result, our clients save an average of $35,000-$90,000 in unnecessary interest.
How does a Mortgage Accelerator work?
After choosing a Mortgage Accelerator schedule to meet your needs, your bi-weekly payments are automatically withdrawn from your account and held in trust at a federally regulated financial institution where they are protected against loss and fraud. This GUARANTEES the protection of your money.
Once we have received funds equivalent to your monthly payment, we issue the payment to your lender. Your Mortgage Accelerator payments are guaranteed to be paid on time, every time. You will never have to worry about late fees or delinquent payments. Any additional funds received over the monthly payment amount will be issued to the lender with instructions to be applied to “PRINCIPAL ONLY”. Our program is not magic but a streamlined process that is designed to assist you in making extra payments to the principal balance of your loan on a consistent basis. As a comparison, fewer than 3% of people will consistently make these “extra” payments on their own.
A Mortgage Accelerator is designed to apply more money to the principal balance of your loan, increasing the equity in your home at an accelerated pace. Research shows that many homeowners will refinance or sell their home within the first five years. After five years with our M.A. program, powered through Avalon, you will have two to three times more money available from the increased equity we helped you build.
A shorter, less-expensive loan through a Mortgage Accelerator equals good financial planning!

HOW IS THE PRP POSSIBLE?

How is this possible?

TARP Background

On October 3, 2008, the Bush administration Congress passed the Troubled Assets Relief Program (TARP) as a response to the economic crisis. TARP was funded with $700 billion to work as a "revolving purchase facility", meaning that the government would either purchase assets and sell them or hold the assets to collect off of them. At first, this meant that the government would use the funds to purchase preferred stock off of lenders to help stabilize the securities market. This plan was met with much scrutiny, as trust in the lenders to use these monies in scrutiny was highly debated.

Over the following months, TARP was amended to allow the funds to be used to support loan modifications for distressed homeowners and any program deemed necessary by the government to avert the financial crisis (i.e., the United Auto Workers).

However, throughout these changes in the months following the initiation of TARP, no monies were being earmarked for those homeowners who were upside down (had negative equity) on their mortgages and were struggling to keep their payments current.

On February 10, 2009, the new Secretary of Treasury, Timothy Geithner, outlined his plan to allow TARP funds to be used to help fund private investors to purchase toxic assets from lenders.

Finally, on March 23, 2009, the Public-Private Investment Program (P-PIP) was put in place to buy those toxic assets from lenders' balance sheets. This program works as a collaborative effort between the public and private sectors to fund the purchase of the negative equity loans (toxic assets) from lenders. If a private lender is willing to purchase the loan from the lender at a reduced price, then the government will fund up to 85% of that write-off to compensate the lender.

Economist and Nobel Prize winner, Paul Krugman acted as a mentor and liaison in developing this amendment to aid in the purpose of TARP, touting the financial gains from such programming. This change in TARP facilitated the ability of all homeowners (delinquent or on time) to secure new mortgages at a reduced price.

Program Background

In October 2008, a group of private investors realized that the purpose of TARP, to be a revolving purchase facility to stabilize the economic crisis, should be used to help the homeowners affected by inflated property values. The purpose of the program was directly in line with the purpose of the group: relieve lenders of toxic assets.

At that time, they began working on developmental efforts to put together a program to help "underwater" property owners: those with negative equity. The group wedged a $4 billion hedge fund to purchase such assets from lenders to then secure the owners with new mortgages at market value.

During the course of this development, the federal legislation regarding the TARP funds acclimated to such programs (as outlined above) to aid private investors interested in helping those homeowners. Through this partnership of private industry and government programming, the investor group was able to further supplement their Principal Reduction Program with government funds to enable those homeowners to be relieved of negative equity.

How the program works today

Through the developmental process of the investors' program and the complimentary adjustments in TARP, the investor group was able to facilitate a program that has allowed initial portfolios of loans with the major lenders to close in the months following, and starting in, July 2009.

The process begins with bundling loans from lenders into "buckets" to present to the individual lenders. The investors come to the lenders with multiple millions of dollars worth of loans and offer to clear the lenders' books of such under performing or nonperforming loans with the understanding of the lenders that they will be recompensed their discounted price up to 85% by the government TARP funds through reclamation.

So, for example, if there is a loan in that bundle that is valued at $300,000, and the property is only worth $200,000 (making walking away from the property quite desirable), the investor group would be willing to pay the $200,000 to the lender, and the government funds would cover up to $85,000 of the discounted loan. The lender would then have $285,000 of a $300,000 loan, allowing the lender to:

• write off the remainder of the loan (approximately $15,000)
• be compensated at a much higher level than a short sale or foreclosure (where most of these loans end up either from inability to pay or choice of homeowners to no longer invest in negative equity assets)
• open their books to new, performing loans.

Once the investors have purchased these servicing rights to the loans at the discounted price, they are able to secure the homeowner with a new mortgage loan at a principal amount reflecting the current market value on the property.

Incentives to the parties involved

Lenders are benefited by:

• Being recompensed at near full value of under performing/nonperforming loans
• Benefiting from bulk purchasing of loans to relieve books at massive levels
• Opening books for new, high-normal performing loans.

Investors are benefited by:

• Owning servicing rights to an ever-increasing number of mortgage loans
• Being compensated from the servicing fees associated with those new loans
• Discounting associated fees with such loans to collect off of the investment in aiding troubled asset homeowners.

The government is benefited by:

• Making private investors carry the majority of the cost on most toxic assets, saving government funding for further incentives with aiding in the financial crisis
• Directly impacting the effects of the sub-prime mortgage epidemic
• Stabilizing home prices in response to the current mortgage crisis
• In turn, aiding in strengthening the financial climate in the United States by eliminating toxic assets that are hindering lending by the major banks and private investors.

Property owners are benefited by:

• Eliminating negative equity on their properties (both homestead and investment)
• Accruing financial stability in an unstable financial climate
• Acquiring financial ownership in properties.

Associated Links

http://financialstability.gov/

http://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program

http://www.gao.gov/cgi-bin/getrpt?GAO-09-504

http://www.troubled-asset-relief-program.net