Principal Reduction Is The Answer To Fixing The Foreclosure Crisis: Why Can’y I Get A Principal Reduction For My Home?
Principal reduction is the holy grail of loan modification: why is it so elusive? For years now, President Obama has been demanding that home loan lenders reduce principal for homes that are worth less than what is owed to the bank and, for the most part, the big banks have ignored him.
Referred to as “underwater,” loans that have a principal balance higher than the value of the home are causing home owners many problems. Homeowners whose homes are underwater are stuck, not being to sell the home and not being able to get a principal reduction in a loan modification. If they do save the home from foreclosure with a chapter 13 bankruptcy or a loan modification, why would they want to pay on a loan that is valued significantly higher than what the home is worth? If they do save the home, they may have to wait years before the value of the home rises and the principal balance on the loan is paid down enough to be able to sell the home later. And, if they do save the home, they may be paying a much higher monthly payment than they could be if they rented a similar home or if, after rebuilding credit, buying a new home.
So, why don’t lenders provide principal reductions and why can’t the government force them to do it?
A Washington Post article from as far back as 2012 tells the story of the fight. “The fight over principal reduction has stirred passions since the earliest days of the financial crisis. Consumer advocates and some economists have argued that it is the only way to finally end the housing crisis and bolster economic growth — by freeing borrowers of excessive mortgage debt. But many conservatives have resisted the idea, arguing that it would represent an unfair bailout for undeserving homeowners.”
Treasury Secretary Timothy F. Geithner chastised DeMarco, the then director of FHFA for his decision, even as he acknowledged DeMarco’s right to forbid principal reduction in his role as independent regulator for Fannie and Freddie.
“Five years into the housing crisis, millions of homeowners are still struggling to stay in their homes and the legacy of the crisis continues to weigh on the market,” Geithner wrote. “You have the power to help more struggling homeowners and help heal the remaining damage from the housing crisis.”
The Fight Continues.
In 2014, the fight continued with Elizabeth Warren taking on Mel Watt, who most had hoped would bring fresh thinking to the FHFA when he took over the position, wanted to know why the director of the Federal Housing Finance Agency (FHFA) has not acted sooner to help “underwater” homeowners who owe more on their mortgages than their homes are worth, leaving them vulnerable to foreclosure.
Mel Watt, the director, said he has been trying to figure out whether there is a way to responsibly help struggling underwater borrowers by reducing the size of their loans, a type of relief known as “principal reduction.” But he said the issue is a tough one, “perhaps the most” difficult he has faced since becoming the overseer of the mortgage giants Fannie Mae and Freddie Mac in January. See Washington Post article November 2014.
Sen. Elizabeth Warren (D-Mass.) challenged him. “You’ve been in office for nearly a year now,” she said, “and you haven’t helped a single family, not even one, by agreeing to a principal reduction, so I want to know why this hasn’t been a priority for you.”
The short but heated exchange is the latest sparring over an issue that’s been a political hot potato since the housing market unraveled and home prices plunged. Millions of homeowners saw the equity in their homes vanish, and they could not refinance or sell their way out of trouble. Some lost their homes to foreclosure.
The Failed Programs.
There are a number of failed programs that home owners continue to ask about, for example Making Home Affordable and
Home Affordable Modification Program but these programs are nothing but shells of desperation.
Many telemarking representatives like to use the hope of principal reduction as a way to get you to pay their high fees – telling you they have excellent relationships with lenders and they can get you a principal reduction. But don’t be fooled. A principal reduction is next to impossible to get.
But hope continues.
Principal reduction is what is necessary to solve the home foreclosure crisis. Not offering principal reduction is irresponsible on the part of lenders and hurting not only the homeowners that need a principal reduction but hurting the housing market in general by not using the tool of principal reduction to break the hold on low prices that continues to stress housing markets.