Rising U.S. Foreclosures Pressure Lenders to Consider Principal Reduction

[Purveyor]

By John Gittelsohn and Prashant Gopal

Jan. 7 (Bloomberg) -- Efforts by U.S. banks to help distressed homeowners have focused mainly on temporary fixes such as interest-rate reductions that may only put off the day of reckoning, despite policy makers wanting them to do more.

Banks may be forced to resort to a remedy they’ve been trying to avoid -- principal reductions -- as another wave of foreclosures looms and payments on risky loans rise, Bloomberg BusinessWeek magazine reports in the Jan. 18 issue.

While interest-rate reductions or extending loan terms reduce homeowners’ monthly payments, they don’t give much comfort to borrowers who owe more on their homes than their properties are worth. Borrowers who don’t have equity in their homes are more likely to hand over the keys when they run into trouble. “The evidence is irrefutable,” Laurie Goodman, senior managing director of Amherst Securities Group in New York, testified before the U.S. House Financial Services Committee on Dec. 8. “Negative equity is the most important predictor of default.”

The 25 percent plunge in residential real estate prices from their 2006 peak has left homeowners underwater by $745 billion, according to research firm First American CoreLogic -- a number that tops the government’s $700 billion bailout for banks. That’s why Federal Deposit Insurance Corp. Chairman Sheila Bair is considering incentives for lenders to cut the principal on as much as $45 billion of mortgages acquired from seized banks. “We’re looking now at whether we should provide some further loss-sharing for principal writedowns,” says Bair. “Now you’re in a situation where even the good mortgages are going bad because people are losing their jobs.”

Deepening Crisis

The foreclosure crisis is likely to deepen this year in part because payments on many adjustable-rate mortgages are set to balloon. Unless there’s a sharp recovery in property values or a change in lenders’ willingness to cut principal, at least 7 million borrowers currently behind on their payments will lose their homes, Goodman estimates.

Some lenders may be coming around to the idea of principal reduction. “If you can right-size the mortgage and return to an equity situation, the incentive is to stay,” says Micah Green, an attorney at Patton Boggs in Washington and a lobbyist for a coalition of mortgage bond investors. Banks can either forgive principal outright or defer it. In deferrals the borrower must pay back the full amount on the original mortgage when he sells the property; if the ultimate sales price doesn’t cover the principal, the homeowner has to pay the difference, making it a less effective tool.

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http://www.bloomberg.com/apps/news?pid=20603037&sid=aiLTm9QWS2KQ

[Zoeisright]

1. D'oh!!

Let's see, a family doesn't become homeless, a house doesn't stand vacant, inviting vandalism, the neighborhood doesn't decline - sounds like a win/win to me.

Oh, and banksters get less money. Definitely a win.

[Lance_Boyle]

2. Fuck that and the people who thought it up.

Reducing monthly payments to let people keep the McMansions they overbought is no longer good enough? Now my fucking taxes have to pay to give them fucking peace of mind about their stupid decisions? Fuck that.

But I guess they'll do it anyway. I wonder how much of my principal will be forgiven? Anybody have any guesses?

[ljm2002]

5. Well as it stands...

...your fucking taxes are paying the fucking bankers so they can buy fucking underwater mortages from failed banks for pennies on the fucking dollar and yet still have the homeowners pay fucking 100% of the fucking mortgage and to me that doesn't make any fucking sense at all. So the fucking homeow(n)ers will just fucking walk away and the fucking neighborhoods will slide into fucking decay and despair but hey, I guess that's better than giving any of the fucking little people a break, eh?

[Lars39]

6. Fucking A!

:thumbsup:

[xchrom]

3. They're gonna have to do it -- but it does

Mean more equity loss probably for a lot of
people who didn't have these bad loans.

If you live in a neighborhood that had a lot
of bad loans.

[shraby]

4. Even lowering the principle, the banks still won't lose

money because the amount paid in interest over the life of a mortgage is at least double what the house was financed for..if not more. So they will still be getting a tremendous return on their loan.