Excerpts regarding the fed/state plan for principal reductions, from latimes.com:
The most controversial part of the program, and the one most difficult for banks and investors to sign on to, dedicates $790 million to principal reduction. This would write down the value of an estimated 25,135 “underwater” mortgages, which are loans in which homeowners owe more on their properties than what they are worth.
The California plan — as well as programs created by Nevada and Arizona — would pay lenders $1 for every dollar of mortgage debt forgiven. Experts say reducing principal on such underwater loans would go far to reducing foreclosures in the three states because home values have fallen so steeply that homeowners are tempted to walk away from their obligations.
But the financial industry has been reluctant to participate in government-administered programs that would require them to reduce the amount that borrowers owe them.
“If you can’t do the principal write-down, you are limited in what you can do,” said Dan Immergluck, an associate professor at the Georgia Institute of Technology, who studied the different state plans developed with the federal bailout money.
“It is one thing for them to agree not to write down principal when they are being asked to foot the whole bill,” he said, “but when the states are agreeing to match this 50-50, it seems rather ridiculous of the servicers and the investors not to agree to this.”
Out of the three major mortgage servicers — Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. — only Bank of America has told the state that it will participate in a central part of its Keep Your Home program that would reduce the principal balance of certain troubled mortgages, and even BofA has yet to sign an agreement. Fannie Mae and Freddie Mac have declined to participate in the principal reduction part of the plan.
Diane Richardson, director of legislation for the state’s housing finance agency, which created the California plan, said she expects other lenders to follow Bank of America’s lead once the program is underway.
Originally, five states in which home values had dropped more than 20% since 2006 were selected to receive $1.5 billion from the Treasury Department’s Troubled Asset Relief Program. The program grew to cover states with high unemployment, which included California, and more federal money was added. California was initially slated to receive $700 million when the Treasury approved the state’s plan in July. Then even more money was added, resulting in a $7.6-billion program involving 18 states and the District of Columbia.
California, which accounts for 21% of the nation’s foreclosure activity, is the largest recipient of the bailout money. Homeowners in the Golden State also remain deeply underwater, according to recent data. In California, 27.9% of homeowners who owned single-family residences were underwater at the end of the third quarter, according to data released Wednesday by real estate information site Zillow.com. In Los Angeles County, 17.4% of borrowers owed more on their mortgages than what their homes were worth.
Getting banks to write down principal has proved difficult through government programs, though some lenders have done it through their own proprietary initiatives. The federal government’s loan modification program, which is also funded by money from TARP, has always allowed loan servicers to forgive principal on troubled mortgages, but has never required them to do so.
Proponents of forgiving principal say this is a serious flaw. They contend that debt forgiveness is the only workable way to address the problem created by underwater loans.
Usually I’d be mad about this sort of thing. But as of late, I’ve been encouraging bad behavior by our state government. The state is beyond repair, so we might as well just blow up the ship and get this ‘slow sink’ thing over with.
The goal is to save 25,000 foreclosures in the state? Drop in the bucket.
There have been 11,659 foreclosures this year in SD County. To save a thousand or two here and there won’t matter much.
Free tax dollars for deadbeat homeowners! (I mean banks)
Just another gov giveaway to the banks. Banks don’t like this kind of money because it will actually have a visible audit trail.
This is what happens when gangsters take over a business. The only way out of this mess is to force banks to write down the principal loans to what the house is worth. Since much of the home appraisal business went gangster too, it further complicates this solution.
I’d recommend we reduce loans amounts to a percentage (30%) of the borrower’s income (novel idea). The banks take a bath. But that’s what should have happened in the first place.
Why should someone get a principal reduction,feel no pain, and still own 100% of their asset?
At the very least, if you get a principal reduction, then the lender should get no less than a pro-rata share interest in your home just like bond holders effectively swap debt for equity (think GM) in a potential default/BK situation.
Example:
Loan amount $500k
Current Home Value $400k
Forgive $100k
100k/400k=25%
Lender gets a 25%+ preferred position in the home going forward.
I’d be more comfortable with a 2:1 swap as a penalty to discourage the program, but that’s just details.
I have a serious problem with the principal write down plans, probably out of spite, considering the transaction we just completed; out-of-state house we just sold valued at $450k at the peak, and we just sold it for a tad bit over $300k. Now, we too could have refinanced to $450k, but knew the bubble would pop, just like those who DID take advantage of the situation-both individuals and companies. We personally absorbed the loss in value and didn’t expect the government or lender to do so. Allow the underwater homeowners to convert to a fixed rate regardless of loan to value. If they still can’t afford the payment, then they should be foreclosed, and probably should not have bought the house or been lended the mortgage in the first place. Individuals and companies who took advantage of the situation and gained, gambled/took calculated risk, pure and simple.
Incidentally, we DID refi at the peak, didn’t pull any money out, and only did so for a 1% interest reduction and to get away from Countrywide who ticked me off with their incessant calling/refi offers in the middle of the night!
i would hazard a guess that the banks CAN NOT do a principle reduction because it would somehow change the terms of the RMBS that the mortgages are in….
GREAT IDEA! lets have Frank, Dodd, and Angelo run the program for us.
The meaning of gangsterism: what we can and cannot do is sacrificed for ruthless, selfish expediency.
So for example, the rule of law collapses. That’s what’s happening right now. That’s why there is so much anger out here-on the right, left and even the center.
Wall St. and the big commercial banks used the govt. to skirt all the remaining technical/legal provisions that made this great housing Ponzi scheme possible. What was once illegal was dropped over the last 20 years and what is still illegal was ignored by virtually all of the so called oversight/enforcement agencies. As a result, almost NO ONE of consequence has been prosecuted or convicted in perhaps the greatest thievery in the history of modern finance.
NOW, the banks are up on a very high horse trying to demand that everyone else follow the rules.
Rules? What rules. The banks blew up the rules.
The principle writedown as debt forgiveness with no other consequences is a bad idea on several levels. Debt restructuring as a swap of a portion of the mortgage balance for equity in the property as clearfund suggests in #5 is much more palatable. The banks would have a new, performing loan where possible, and the householder would not need to be uprooted. There is still no fix for the homeowners who have no income to service even the reduced debt, however, and there are many of those.
I’ve always been opposed to principle reduction, unless it is somehow possible to make those who profited from causing the phony runups in the first place pay for them (and don’t ask me how to do that).
What I would have preferred is rate reductions for borrowers who have kept the commitment to keep making their payments when others did not, even in the face of falling values, underwater loans and life events like job loss or catastrophic illness. People’s payments would be reduced, but they would still owe everything they borrowed and would still take losses if they sold below what they bought. For those not living on the edge of what they can afford, rate reduction would provide some breathing room, and for those not in distress it would put real, spendable cash in the hands of people who would save or spend it, a direct “economic stimulus.” Of course, if people still can’t make payments even if their rate goes to practically zero, it’s time to throw in the towel.
The same lowered rates should also be available to prospective buyers who have made the effort to save up down payments, to make it easier to buy all those foreclosed homes.
Yep, moral hazard writ large. I don’t have a problem with judicially directed cram-downs as part of a legitimate bankruptcy, but otherwise NO.
You can bet the government will tax whatever reduction is made as ordinary income. How’s that gonna affect the homeowner? Government will be happy to get extra money!
The only way this really makes sense for the banks is if, as Clearfund speculated, the banks get the first 25% of any future home appreciation. Plus, 25% is only if they are lucky. For a whole lot people they are looking at 50%.
I suspect that if the bank where going to take all the future price appreciation in exchange for writing down the principal there would be this chorus of “that’s UNFAIR” from speculator bubble buyers.
[quote=Daniel]You can bet the government will tax whatever reduction is made as ordinary income. How’s that gonna affect the homeowner? Government will be happy to get extra money![/quote]
I would expect something like this to be buried deep in the tax code.
Forgiveness of debt has been taxed for years so it is not “buried” at all…it was just suspended as another variety on the cheese aisle.
I’m thinkin’ the $790 mil. is just a down payment to see how things go. If successful, that number will jump into the billions and buy a few votes to boot. Of course, the law of unintended consequences will always accompany a morally bankrupt initiative, so can we expect breakeven buyers to be the next “distressed” group to throw in the towel..?
With downward pressure on wages, still high unemployment, a “toppy” stock market and increasing costs for insurance, fuel and food staples, this will be interesting.
Just allow cramdowns in Bankruptcy on principal residences like we do for second homes and yachts. It worked prior to Bankruptcy “reform” and will again.