Next Stage of Loan Modification: Principal Reduction
If there’s any consensus surrounding current loan modification efforts, it is that they aren’t working. Depending on whose numbers you believe, between 1% and 2% of all eligible borrowers have had their mortgages permanently modified. While the figures for temporary modifications are more impressive, experts argue that most of these borrowers aren’t ultimately being helped, since they will likely default anyway. In this sense, loan modification is actually worsening their plight. [Chart courtesy of WSJ].
Anyone who has applied for a loan modification can surely attest that the most banks are usually willing to offer is a slight (and often temporary) reduction in one’s interest rate and/or lengthening the term of the mortgage. As advocates for borrowers point out, such efforts are quite in-effective since they do nothing to ease the long-term financial burden. Moreover, they don’t account for the fact that for many borrowers, the problem is not that their monthly payments are unaffordable but that their mortgages exceed the value of their homes. The issue for these borrowers is not they are unable to repay their mortgages, but that it is no longer economical to do so.
What’s the solution to this problem? The answer is principal reduction. Borrowers who are having trouble repaying their mortgages would be helped both over the short-term by a lower monthly payment, and over the long-term via a lower debt burden. Those whose mortgages are underwater, meanwhile, would have their equity restored, and thus have more to lose by “strategically defaulting.”
Presently, the incentives are such that principal reduction is rare. Of course, no one is willing to accept the blame for this. The lenders claim that the fault lies with the investors, who insist that of course lenders are blocking the way. The government is not ready (or willing) to dive in, and the courts remain powerless. From where I’m sitting, something has to give. A not insignificant number of borrowers are now contemplating strategic foreclosure, which is a lose/lose situation for everyone. The lenders better come to their senses soon, or else…
February 13th, 2010 at 10:34 am
The banks will never agree to principle reduction.
This won’t really matter though.
There was literally astronomical monetary inflation that hidden in housing prices (and to a lesser extent, health care), which for some amazing reason is left out of calculating the CPI.
If it had been included (as it should, housing isn’t discretionary), interest rates would have been hiked long before the housing boom started.
But it wasn’t. The Fed, in collusion with the bankers of the world, attempted to indebt the entire world to them in an amazing and unprecedented display of avarice.
Ironically, this will result in massive defaults on every level, from personal to sovereign.
The Minsky Moment was probably passed sometime in 2003. Get ready for “The Great Reset”!
February 14th, 2010 at 5:39 pm
Lenders should be forced to modify loans with principal reductions – as lenders promoted the fraud form the onset with inflated appraisal and egregious mortgage terms (only the lender could approve a mortgage loan). Lenders made a lot of profit on the fraud and CEOs soaked it up – it is time to give back to the borrowers.
Your “best idea” – let lenders share (after principal reduction) in the upside from home-price appreciation is OK – but only if the lender also shares in paying the monthly principal and interest. Otherwise, as always, the homeowner is still bearing the burden – and home ownership is not really home ownership. Borrowers would still walk away – and rent, if necessary, until they can recoup their losses that the banks bestowed upon them.
February 20th, 2010 at 1:53 am
The only patented debt for equity swap is the HEFI (home equity fractional interest). It is the only way to truly participate in appreciation without hindering the privileges of homeownership. Not only does this tool eliminate any moral hazard associated with principal reduction but it puts forth a standardized instrument that can be securitized and sold into the capital markets.
Please check out our website or I can email you a version of our loss mitigation white paper.
Brent Perkins
Director
EquiDebt Solutions
602-774-3741