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Will Banks Finally Agree to Lower Principal on Home Mortgages?

Posted by Administrator (admin) on Feb 09 2010
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Blurb from  "Banks may be forced to resort to a remedy thethey'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 US House Financial Services Committee on Dec. 8.  'Negative equity is the most important predictor of default.'  

"The foreclosure crisis is likely to deepent this eyar 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 in their payments will lose their homes, Goodman estimates.

"Banks that negotiate principal reductions have seen positive results.  Principal forgiveness can be more than twice as effective in slowing re-defaults than reducing an interest rate, according to a December study by the Federal Reserve Bank of New York.  Cutting a homeowner's principal would be especially powerful in Florida, Nevada and Arizona, markets likely years away from reocvery, said Joseph Tracy, executive vice president of the New York Fed and coauthor of the study.

"So far the feds haven't put pressure on banks to forgive debt...But the FDIC and other regulators are looking at measures to promote the writedowns.  Mark Zandi, the chief economist for Moody's, who has testified before congress on housing issues, proposes that banks receive a federal match of $1 for every $2 in principal reductions they offer to homeowners who were victims of predatory lending practices.  'You're not going to wipe out all the borrowers' negative equity, he says.  'This just gives them enough hope to get them committed again.'"

Feds should have done this in the first place, and then some.  By bailing out legitimate homeowners in distress, instead of paying billions to banks - then asking the banks to help out the homeowners, which really did not happen, there would have been much less toxic debt, which would have helped the banks, plus there would have been far fewer foreclosures.






Last changed: Feb 19 2010 at 12:18 PM