Although there are some obstacles to VA loan principal reductions, they are possible. Image: Fotolia.
Although there are some obstacles to VA loan principal reductions, they are possible. Image: Fotolia.

WE’RE HEARING that some servicers don’t believe they can modify a VA loan. And the Department of Veterans Affairs recently shocked servicers by issuing a circular encouraging them to consider principal reductions to help underwater borrowers.

“We thought it was worth our while to issue a circular to remind them that they can do principal reductions,” said Mike Frueh, the director of the VA Loan Guaranty Service.

“It is really an investor decision,” Frueh told NMN. “Servicers should talk with their investors and make informed decisions,” he added.

The June 28 circular mainly discusses the use of the principal reduction option that is available under the Home Affordable Modification Program.

However, the VA director noted that servicers can use a proprietary principal reduction option, provided it doesn’t conflict with VA loan modification guidelines.

The circular notes that principal reduction in “connection with a loan modification may produce a higher-than-expected return for a servicer than termination of the loan, especially when the sum of the net property value plus VA’s maximum claim liability is less than the total indebtedness on the loan. In addition, the 25% guaranty on a modified loan may result in a higher dollar amount of guaranty for any future claim.”

Frueh noted the VA doesn’t know how many veterans are underwater.

But he wants principal reduction to be an option so veterans have every opportunity to remain in their home. If a principal reduction can keep a veteran in their home, “I want the servicer to evaluate that. I don’t want them to think we don’t allow it,” the VA director said in an interview.

VA offers incentive payments for loan mods. But VA is not able to reimburse for the amount of the principal reduction.

BLOG OF THE WEEK: Garth Graham’s “The Three-Fingered Salute.” And he’s promised to do two more with similar titles. We’re dreading when he gets to the one-fingered salute! Actually, though, those three fingers refer to the ones that hit Alt-Control-Delete to get a restart when nothing else will work. Everyone has resorted to that three-fingered salute at one time or another (come to think of it, everyone has probably resorted to the one-fingered salute at one time or another). Looking forward to the next two installments!

MOST READ/EMAILED: It’s unanimous. Both the most read and the most emailed content of the week is Brian’s piece on the Circuit Court’s decision on loan officer overtime. While the ruling favors the industry, it is actually a narrow ruling that may not bring the love the industry is looking for. At any rate, it will keep the lawyers up overtime reading the decision!

OH, THOSE VINERS: Well, the last thread has been posted on the Grapevine. Well, no, not really, but one poster says that after him, no more! Of course his request was immediately ignored. The Grapevine is alive and well, and soon will be new and improved. So, mortgage professionals, keep posting about what’s for dinner and the Trayvon case and oh yes, where you can place that “weird loan” you have. One poster is going to offer his Mortgage Grapevine hat for sale on eBay. We have our “Weird Loans” hat, and nobody’s going to get it away from us!

GO FOR IT: Nominations are due for the 14th annual Mortgage Technology Awards. Check it out here for our dozen categories and enter the one that fits you best. The awards will be given out at MBA 100 in Washington on Oct. 27 and as usual they will be the occasion for the best party at MBA that night. And don’t forget to mark your calendars for our 15th annual Mortgage Technology Conference, Nov. 18-20 in Fort Lauderdale.

Mark Fogarty is editorial director of the SourceMedia Mortgage Group and has been commenting on the mortgage market since 1984. Brian Collins is the group’s senior editor and D.C. bureau chief. He has worked the mortgage beat since 1988.