DISQUS

ann · 1 year ago

First of all..the principal reductions are already taking place in certain markets..regardless of BofA stamp of approval..many investors who are buying mortgages on the market at a discount are already contacting borrowers to reduce the principal and get them, if possible to refi the loan so that they can collect their money..

http://www.latimes.com/business/la-fi-loanbuyer...

Paul · 1 year ago

Yes, the principal reductions are already taking place. Particularly with second mortgages. I am actually seeing homeowners being solicited to sell their home on a short sale after their mortgage has been purchased (at a discount) by another lender. The fact is that these write-downs that have taken place (and many, many more to come) are equating to 'principal reductions' on the balance sheets of these institutions. Once sold at a discount to another institution, that new holder of the loan is overjoyed when the loan is then paid off at a discount.

morganb · 1 year ago

Thanks Paul - I think the interesting question is the logistics of the
mass-adoption of this practice, which according to our commenters
doesn't seem likely at this point, yet is still an interesting dilemma
in its own right.

BawldGuy Talking · 1 year ago

Good catch, Morgan. Reductions, lowered payments/interest, etc., make so much more sense from the lenders' point of view.

I'm still trying to figure out why they're willing to amputate when a little surgery can save the limb.

In your opinion, why are lenders apparently going against their own best interests?

morganb · 1 year ago

I think the amputate mentality simply comes from the previous year's
run up. In the past decade foreclosing on a home was a sure way to
get it quickly sold and usually at 100% recovery or greater. So banks
dialed in the systems to crank through foreclosures. Foreclosing is
like building a Model T, division of labor, assembly line, no thought
needed, crank it through the system. Loan modification, principal
reductions, etc. require *gasp* thinking to find a better way. While
the arguments of equitable treatment of all mortgage-holders are
important, this is clearly as less-painful step for lenders than
foreclosure in this current environment.

Thanks for the comment!

BobK · 1 year ago

Bernanke spoke favorably of principal reductions as a tool, and everybody took it to mean that it was some sort of policy recommendation. But in reality, I think it's just that some economists feel that it's a better choice *for the bank* than some of the other concessions they make to troubled borrowers, such as deferred payments or reduced interest.

Offhand, I can see that if a bank reduced the borrower's principal, it would increase their equity in the home, and thus increase the incentive to keep up payments. Of course, it wouldn't help in most cases, but I imagine there are certain circumstances where it might prevent a short sale.

Bob · 1 year ago

The key word in that quote was "appropriate". Extremely subjective.

morganb · 1 year ago

Bob - I agree. I can see how a principal reduction of X dollars that
is less than the cost of foreclosure + recovery of new sale price is
extremely attractive to lenders at this stage in the game. I am more
interested in the logistics of how it would play out on a large scale.
At this point it doesn't seem likely given the responses here, but
does pose an interesting dilemma of its own...

James Freeman · 12 months ago

I have 5 homes all maxed out with 10 mortgages, all balances on the second mortgages are greater than the value of the homes after a sale including selling costs. I can rent all 5 to cover the first mortgages including all other monthly costs at a break even, four already are rented. Additionally, all first mortgages are fixed rate 30 year low interest rate loans that average six percent. So if B of A/Countrywide would elimanate the second mortgages, I would catch up all first mortgages all currently four months (seconds behind 5 months) behind with money I have been saving from the rents collected. Then none of these properties will go up for sale that is further pushing late as well as on time paying home owners out of thier houses from rapidly falling prices or making them want to leave. I am sure such relief will be followed by certain terms, such as not being allowed to sell for 5 years or more. I was surprised to read the bailout package and there was no talk of help for homeowners, funny that wallstreet was fully informed of the help they are getting, but mainstreet has to hear it word of mouth or through internet searches.

Holden Lewis · 1 year ago

Morgan, servicers have been forgiving debt in rare cases for some time now. In October, at the Mortgage Bankers Ass'n convention in Boston, a Countrywide exec, speaking on a panel about loss mitigation, said that Countrywide was approving some principal reductions. None of the other servicers batted an eye. I asked the Cwide guy about it afterwards, and he said principal reductions were rare, and that there had been no change in policy. I've looked for people who've received principal reductions or short refis, and haven't found any who are willing to talk about it for attribution. I don't think the BofA thing is much to get excited about.

morganb · 1 year ago

Thanks Holden - It will be interesting to see if it becomes a
more-formalized tool or not. If it does, of course, many of the
questions still need to be answered, if it is an arcane,
back-room-deal type option that you never hear about it becomes of
less import and just a curious by-product of the housing bubble.

BobK · 1 year ago

Yeah... I think a lot of folks heard that testimony and immediately thought of some sort of government policy (perhaps including certain Congresspersons... it's always dangerous to give them bad ideas).

But I interpreted Bernanke's comments simply as advice to the banks, suggesting they reconsider something that had historically been anathema to them. Probably a lot of economists within the banks had similar ideas, but until somebody in Fed/Treasury had given it credence, banks were unwilling to risk it.

(oops... replied to the wrong thread... sorry)

movermike · 1 year ago

Morgan, are there tax implications for a mortgage reduction?

morganb · 1 year ago

I think there are. I believe it would be similar to the implications
of a short-sale. A 1099 may be issued for debt-relief by the company
providing the relief. I'm not a tax expert though - so definitely
talk to a certified accountant or other tax expert.

Holden Lewis · 1 year ago

Bush signed a law late last year called the Debt Relief Act, and it removed the tax on forgiven debt in short sales and short refis (refis with debt forgiveness). I can't remember for sure, but I think this tax provision is temporary.

drumfast00 · 1 year ago

Not everyone has the opportunity to maintain a healthy mortgage. People are worse off, than when they started their current mortgages. This downward hinge is obviously effecting millions. You cant put the blame on higher cost of living to the homeowners who, now, cant keep up with previously do-able payments. I agree that giving a handout to deliquents is unfair to those keeping up. Yet, is it fun to watch the rest of your neighbors suffer, as you grill your steak to its regular perfection? I'm sure the smell is very potent to the neighbors sitting in the driveway managing the yard sale of things they dont really want to rid of. Think about it, the future of all of us, doesn't always have to revolve around the privaleged few. (sorry for the spelling)

morganb · 1 year ago

I agree - I don't think it should be centered on the privileged few, I
just don't understand why those that can actually pay their mortgage
(especially if they've put money down, used fully-documented income,
etc.) are penalized vs. those that lied about their income and
over-stretched expecting their home to go up. I just want any actions
to be as equitable as possible.

drumfast00 · 1 year ago

For sure. Its hard to accept its becoming a have and a have not world. The whole damn thing needs to be re arranged. Starting from its source. What source is that? I sure wish I knew. haha.

LibertyNewsprint · 1 year ago

I think the best way forward for everyone is for the Government to subsidize
low interest fixed rate SHORTAGE loans. This is the most responsible way
to help out those who find themselves unable to pay a way out of thier homes
with viable options that do not hurt the economy an present a "Moral" Hazard.

A Solution to stop the bleeding in the Housing Industry-
Government Subsidized Short Loans.

For those who bought home in the past 5 years or have an adjustable loan that will reset sometime in the next 5 years.

In order to stop the precipitous decline in the housing industry government needs to provide subsidized "Short" loans for the difference between what a homeowner can sell there house for and the amount the homeowner actually owes. This loan will provide rates the homeowner could receive on a regular home equity loan for up to $100,000

This will allow homeowners to reevaluate their financial positions to more fiscally sound situations if necessary. As it stands now homeowners with good credit have no other choice than to wait until home values increase before they can have the freedom to seek other housing accommodations.


How would this work:


Homeowner A house's current value is $200,000 he owes $250,000.

His payments are about to reset from 4.8% to 7.0%

That’s a payment of $1467 to $1664 and he can't afford it.

Homeowner A sells the house for $200K

Now He Has Options:

Option A:

He gets a loan from the government for $70K at 7% that’s $465 a month.

He finds a smaller place for sale at $150,000 puts 20% down from the government loan.

He gets a mortgage for $130,000 at 6.5% and pays $839 a month.

Now Homeowner A is paying $1,304 a month on a mortgage the will not reset. That’s a saving of $163 a month in the mortgage payments.

Option B:

Continue to pay off the government loan of $50K and find a place to rent.

That’s $333 a month plus rent he can afford to rent an apartment for $1,134


The Benefits of Government Subsidized “Short” loan?
This will allow homeowners to pay back the shortfall without damaging their credit.
Also, by stabilizing hundreds of thousands of homeowners the economy will benefit.
As it stands now homeowners have few viable options that only will exasperate the decline in the overall economy.
Stop the decline of housing prices
Extend more help to a greater amount of homeowners.
Keeps the homeowner from transferring debt to government and lenders.

Jill · 1 year ago

Certainly someone must be approaching McGee to pin him down on what he has said? A call to journalists!

KayeThomas · 1 year ago

I see a number of problems with the whole idea but two really pop up.. first if this becomes the "norm" I would suspect we will see the demise of the 30 year note. No one will want to make any loan of that length with the possibility of losing 10-20% of the principle without a huge increase in rates.

Secondly the government is penalizing those who are financially responsible. I expect the backlash to really heat up from owners/buyers who are prudent.

Cheryl · 9 months ago

I have a fraudulent mortgage loan with Bank of America. It was supposed to be a Fannie Mae reduction loan and after I closed found out I do not have a Fannie Mae loan. I filed aa lawsuit and BOA quit taking my payments at the bank trying to foreclosure so I have to pay my attorney the payments to send to BOA I learned that Banks not only sell the foreclosed houses for 50% of value, but they also file a Title Insurance Claim that the homeowner paid for and Lender receives a check for the loan balance. That is a big incentive.