In prior blogs and videos, I’ve referred to a homeowner’s chance of receiving a significant principal reduction being similar to winning the lottery. It just didn’t make sense for the investor of the loan to take such a big hit rather than cooperating with a short sale or just repossessing the property through foreclosure.

Of course, that was before two big things happened in the lending world: 1) The $25B Robosigning Settlement, and 2) The passing of the Homeowner’s Bill of Rights.

Have things changed?

In the past few weeks, some homeowners have called me to tell me they’ve been granted very generous principal reductions that lowered their loan amounts at or below today’s market value of their homes. In 2 instances, the reduction was greater than $200,000! The principal reduction was combined with a fixed interest rate at 2%. Other agents I network with have reported similar instances.

Does that mean everyone will get the reduction if serviced by the big 5 (Bank of America, Chase, CitiMortgage, Wells Fargo, Ally)?

After homeowners were duped into false expectations with the release of the “Making Home Affordable” plan of a few years ago, they know to approach this news cautiously. According to HousingWire.com, Bank of America completed 3,823 modifications within a 2 month period that included principal reduction as of August 21st. The Treasury’s monthly servicer report from July reported 16,313 Bank of America loans requesting modifications within a 1 month period. Although the numbers come from different durations, you can see the low ratio here: about 1 in 10. Expect other servicers are to reduce principal on a similar ratio of loans.

After the settlement and the Homeowner’s Bill of Rights passed, why isn’t everyone getting a principal reduction?

There are several factors here — some I’ll speculate about based on first accounts from homeowners and some facts we can be sure about.

1. FACT: It’s all about debt-to-income ratio. Even after principal reduction, you still need an income you can document. Fortunately, servicers are accepting more “unconventional income” (roommate rents, relative’s salaries, allowances from parents, etc) just as long as there’s paper trail. Many other requirements will remain in place and you’ll need to know them.

2. FACT: Servicers will remain incompetent. Just because you passed the test, doesn’t mean that your test will be submitted for grading. All of the process flaws, poor training, and inefficiencies will not get better simply because the banks were forced to do something. Paperwork will still get lost, applications will be denied for petty reasons, and you will still encounter long hold times on the phone. Working with a lender on a modification will continue to be a “2nd job” for homeowners and some of it will remain beyond your control.

3. FACT: Investors still want their money…yesterday. While you may be a homeowner trying to do what’s right and keep your home in the long term, keep in mind that there are many that have given up and just want to “milk the system.” They can play a number of gambits with the servicer to extend their mortgage-free time in the home: timely applications for modification, bankruptcy filings, wrongful foreclosure hearings, fake short sale offers, etc. As a result, foreclosure postponements are being scrutinized with tighter requirements. In many cases, a homeowner trying to play by the rules will be punished for the deeds of another homeowner who doesn’t care.

4. FACT: The investor of your loan can not be a GSE (Fannie Mae, Freddie Mac, or HUD).

5. SPECULATION: The robo-signed loans seem to have some common traits: non-fixed loan products: adjustable rate mortgages, pick-a-pay/option ARM, interest only and loans that were serviced by a company that went under: former Countrywide and Washington Mutual loans. The loans seem to have been originated between 2004-2006.

I’ll need some help on what type of loans you’re seeing. If you’ve been granted or have witnessed firsthand a generous principal reduction that seems tied to the settlement, please comment with what you know about the loan: Year originated, servicer, investor, and type of loan (ARM, interest only, etc).

For more information on the settlement, visit www.NationalMortgageSettlement.com