In a report released earlier this week by ratings agency DBRS, the firm revealed that one of the biggest and most controversial topics in the loan modification industry is playing one of the smallest actual roles. According to the report, only 2.8 percent of all loan modifications performed during the first quarter of 2011 actually involved any sort of principal reduction. And that number is up nearly a full percentage point from the same time frame last year. The only blip in the trend is the third quarter of 2010, when 5.7 percent of loan modifications included some form of debt forgiveness[1]. So why does this matter? After all, it is perfectly understandable that lenders would shy away from debt forgiveness via principal reduction. They want to remain “in the black” just like the rest of us. But some analysts believe that the industry-wide reluctance to perform principal reductions on a wide scale is actually what is holding back the housing recovery.
A campaign calling itself the “New Bottom Line” (NBL) has recently released its own report that argues that if lenders would just start writing down mortgages, the entire economy would soon turn an about-face. That’s right: according to NBL, “if banks wrote down the mortgage principal of underwater borrowers it could pump $71 billion per year into the economy and create more than 1 million jobs annually”[2]. And in the face of that, what’s a little debt forgiveness on the part of lenders, right? Furthermore, NBL points out that this is not necessarily a doomsday knell for the banks anyway. “Last year, the nation’s top six banks paid out more than twice the cost of the plan ($71 billion per year) in bonuses and compensation alone,” it says[3]. Furthermore, according to the same report, “the nation’s banks are sitting on a historically high level of cash reserves – $1.64 trillion.”
In light of this information, do you think that banks need to ramp up the principal reductions?
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[1] http://www.dsnews.com/articles/study-less-than-3-of-mortgage-modifications-involve-principal-reductions-2011-08-22
[2] http://realtormag.realtor.org/daily-news/2011/08/23/report-fixing-housing-crisis-will-create-1-million-jobs
[3] http://rismedia.com/2011-08-21/fixing-the-housing-crisis-would-create-one-million-jobs-annually/
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I’ve be involved in short sales for sometime now so I get to hear all the stories regarding loan mods. This government program has been an abysmal failure for sure. I’ve said from the beginning that the only way a loan modification will work effectively is with “principal reduction.” The banks would have a performing asset because more people would be able to keep their home. I know these people signed a mortgage with the obligation to pay in full. However, I’ve seen far to many good folks that have been hurt by this horrible economy. The old saying, “Bad things happen to good people” applies here in a lot of cases.
Whatever Lenders can do to keep folks in their home & paying would be much better than foreclosing. After all, how much does the bank lose by foreclosing on a house? If the bank forecloses, the house goes into an inventory of bank owned property where it eventually gets sold for a lot less than the amount owed on the mortgage. If a Lender agrees to a short sale, what happens then? Well, the Lender agrees to sell for an amount less than what’s owed on the mortgage. Is this not the same as a “principal reduction?”
The only difference now is someone else owns the house at the reduced amount. Through the foreclosure process, peoples credit are destroyed & lives are turned upside down, neighborhood home values decline, the banks lose gobs of money through missed mortgage payments, attorney fees, forced maintenance (taxes, insurance, holding cost), on yeah, and more attorney fees!
We the people have all been affected by the sheer incompetence of this government program called loan modification. It is, and has been a miserable failure from people that don’t know their a** from a hole in the ground. In my humble opinion, the only way for a loan modification to work effectively is to cut out all the bureaucratic red tape, and reduce the principal amount on mortgages.
To Mr. Byers, banks are more than a business, they are now running the government. When I voted for my senator, congressman and president, nowhere on the ballot did I see any names from Goldman, the Bank of America, Citibank, etc. You seem to leave out of your diatribe all the crimes that were committed by the banks.
If you or I had forged official documents, lied to investigators and committed outright fraud in selling bad investments to the public, we would be eating bologna sandwiches behind bars. Many a bad contract has been negated in courts because they were fradulent despite the fact that they were read by the signer.
It is obvious to me thtat there are many in this country without an ounce of sympathy or compassion for their fellow man. And we continually ask the question, how did we get to this point. We got to this point because of greedy banks and attitudes like that of Mr. Byers.
The fact banks are refusing to reduce principle is just more evidence of their greed and bottomline. If we continuously use the poor excuse of business, we will continue to move forward toward a state of serfdom. We are already halfway there. And should we continue to support a corrupt system that was designed by and for the rich? We have been sold a bill of goods about capitalism and most have eaten up the propaganda and fear mongering concerning social programs. But don’t look now. The biggest recipients of socialism have been the mega-corporations, the rich and bankers. Yet, these greedy individuals are whining all the way to the bank, sucking up our money, livlihoods and our country!
Behind all of this crap and those that want to hold people to bad contracts
Modifications with principal reductions? Sure, why not ask the bank to share losses incurred in a plummeting market? Just one question. When a market goes back up, and the value of a property — and its equity — rises, will we then share the gains with the mortgage lender?
The banks can hold onto that worthless paper as long as they want. More sooner than later there will be NO FAMILIES BUYING at any price. Call it whatever you wish! The “law of the street” or the “definition of value”. The products are only worth what people are willing to pay. The banks have supressed the appraisals to where properties have no relative value. When the newly renovated house is worth equal or less than the foreclosed or “as-is” short sale down the street, what do you think happens!
Like a spoiled child holding his breathe for what he wants! The banks are going to get the same thing the child needs to get! A whipping, they do not get what they want and go to bed with no dinner! The longer they wait, the worse the condition of the product and fewer buyers! They have this mentality because they do not have to create or make anything. So they do not realize when what they have has little or no value because nobody is buying at ANY price!
First of all, the “loan modification” pipe dream may be one of the most unfunny jokes ever played on the unwashed masses.
Secondly, anyone who disagrees that principal reductions would solve a large percentage of the “housing problem” either has been brain washed or has no brain to wash.
Here’s how the lenders participate in the housing market turn-around once principals are reduced… They get to relend the money once homeowners can afford to sell their homes. Was math class hard for you?
Your concern for the mortgage lenders is commendable (sarcasm dripping!). It’s just not needed.
When lenders (banks) finally and thoroughly get it that they are not immune to losses, the we might see loan mods with reduced principal. They have come to realize in short sales..so why don’t they in loan mods, and spare everybody the grief
Our Son is in the middle of a “strategic foreclosure” in California. His lender is unwilling to budge on principal reduction leaving foreclosure as the only option. Has no one put on their thinking cap, remember the Kobiashi Maru. If you are in a no win scenario and want a solution where winning is possible, then change the rules of the game. How about lowering the amount owed, keeping the homeowner in their home, and in exchange for this bailout the bank would share in the eventual profit when the homeowner sold the property. Another option worthy of discussion is to require that when the value of the home reaches the original purchase price, the homeowner could choose either to sell the property repaying the loan reduction amount, or restore the original loan amount since the market had recovered.
Hyper-inflation is coming and this will mean the dollar value of the home is sure to increase dramatically. Unfortunately, each dollar will have less buying power but profits will be realized none the less. This inflation will assure a bounty for both the banks and the government at the expense of the taxpayer/consumer but that is what happens when we elect representatives (of both party’s) that are in the game for either themselves or to benefit their monied benefactors.