12/30/2010

A Mortgage Principle Reduction for All of Us?



Controversy is arising as the Treasury Department announced some progress in their recent initiative of reducing principle amounts for homeowners in need. Rather than just reducing rates and lengthening loan terms, reducing principal loan amounts as part of the equation seems to be working out. this from the office of the Controller of Currency. The report states that it has gone from 22 reduction actions in the 3rd quarter of 2009 to 6011 actions in the 3rd quarter of this year. It makes sense really, that reducing the principal amount (amount owed on the home) and with the historic low interest rates the payments would be much less, which reduces foreclosures and helps the homeowner. It appears that the government is trying to get the mortgage companies to feel the same pain as the rest of us. After all it was the predatory lending practices that caused the problem to begin with, right!?!


Bank of America beat them to the punch and has already been reducing mortgage principles but only with the mortgages that were the high risk Adjustable Rate Mortgages (ARM) of the people in trouble.


This all sounds good but what about the millions of people that are making their payments on time? Should they also get a mortgage reduction? What happens when the market changes, and it will, will the folks that have continued to make payments and still carry the same principle amount be able to sell their homes? Will they have to bring money to the closing table when they sell? To me, it makes more since to reduce the principles of all the homes that are upside down so we can all start over. This is how it would work...Initiate a government appraisal process that re-evaluates all the homes in each state based on current sales then lower each homeowners principle to that amount. Realistically, the people that were going to foreclose will anyway and when they do it won't be sold as an REO (Bank Owned) property for any less money than they would have gotten and could be sold for more because the home won't be torn up!


The investors are already losing millions of dollars but it could stop the bleeding. This would allow people to start selling their property again giving the investors a chance to get new loans from credit worthy borrowers to offset the losses. That way the folks in trouble can sell their homes out right without damage to their credit and the rest can sell too! Win Win, I say :)

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