Government Pushing For Mortgage Principal Reduction in Servicer Settlement; Good Move or Drop in The Bucket?

The US Administration is trying to push through a deal requiring mortgage lenders to provide loan modifications that reduce the principal balance of residential loans. As reported in the Wall Street Journal Lenders have been reluctant to do so from fear that it would encourage borrowers to stop paying their mortgage, hoping for a principal reduction modification. If pressed, they may also say .. “Oh, by the way, we also do not like principal reduction because it means we get paid less over the life of the loan.” The reason California Real Estate law has anti-deficiency protection is to requires the lender to properly value the real estate in the first place, something lenders had failed to do over the last decade.

The proposal is intended as part of a global settlement which includes the Fed regulators, State’s Attorney Generals, and the lenders. The settlement could clear the uncertainty around foreclosures that has come to exist. Economists warn that foreclosures need to proceed to allow the housing market to continue on the path to recovery. The monetary fund is rumored to be around $20 billion. Is this enough?

Mark Hanson’s analysis points out that if all the $20-25 billion is used for loan modifications for the currently 4-7 million delinquent borrowers, it averages $2500 to $5000 dollars each, which is nothing. In fact, a settlement relieving servicers of potential liability for wrongful foreclosures unleashes them to more quickly proceed to foreclosure.

So far there have been 3 & 1/3 million foreclosures and shorts sales in this housing crisis, and another 7 & ½ million in default or in foreclosure. At the current rate of default, Hanson suggests we are now only 25% through the housing crisis. This solution, which will be unlikely to fix many underwater loans, will clear the way to ramp up foreclosures and bottom out the housing market.