Underwater Mortgages and Principal Reductions

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Home Destination:Underwater Mortgages And Principal Reductions FHFA’s Tough Call on Underwater Mortgages and Principal Reductions and the Reasons Why. Learn about the Minnesota Mortgage Program. mortgage principal reductions


"No" To Principal Reduction Alternative Program


Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA) which oversees Fannie Mae and Freddie Mac, recently said he will not participate in the (hopeful) Principal Reduction Alternative program which was created by the Financial Stability Act (FSA) of 2009. In quick summary, FSA is meant to reduce the amount owed by homeowners to their mortgage lender. As the U.S hears this decision, it may not be easy for distressed homeowners to be told "no" and neither is it easy to say "no". Efforts to help stop foreclosure are being balanced with funds available and the teetering housing recovery.


Update On Regulator of FHFA Position


After a long wait, HousingWire posted President Obama anticipated announcement of his expected pick, Rep. Mel Watt, D-N.C., to remove DeMarco as head of the FHFA. According to HousingWire, this places the regulator on course to rapid changes with a potential populist in-line with the While Houses view of helping enterprises gain more principal mortgage reductions. This renews concerns from DeMarco supporters. A chief opposition to principal reduction is the moral hazard over loan forgiveness that leaves a gapping loop whole for less responsible homeowners to find a way for the system or other tax payers to cover costs of their gain. Critics worry taxpayers will pay to reduce loan balances for homeowners, who may sell their properties at a profit and keep the proceeds.


Adding to the new mortgge bailout trems, new changes are pending on principal home mortgage reductions options.


Opinion: Principal Mortgage Reductions Will Save Taxpayers Money


While everyone hopes to boost the housing recovery, just how that is best accomplished renders varying opinions, especially when it comes to whether or not  principal mortgage reductions help homeowners help or hinder the overall burden of paying for them. The Congressional Budget Office (CBO) released the result of its investigation into the potential costs a widespread mortgage principal reduction program may have on taxpayers' bottom line. The CBO sums up their research with a statement that a program supporting principal mortgage reductions could actually save taxpayers up to $2.8 billion.


>Opinion: Principal Mortgage Reductions Will Cost Taxpayers More Money


At first blush, a principal mortgage deduction may seem free, or to let money owed "evaporate". We all want to help a struggling homeowner find relief from the worry of losing their home. However, if taxpayers will ultimately have to pay for mortgage principal reductions, how many paying households can actually afford that burden as it rolls unto their shoulders? As of the end of 2011, taxpayers had already spent nearly $185 billion to keep the mortgage giants afloat.

While analyses show a clear and more immediate benefit to the Enterprises from employing principal forgiveness, opinion on the benefit or burden to taxpayers varies from negative to positive depending on the DTI distribution. DeMarco's past comments indicate a concern that this further illustrates the sensitivity of the model-based results to certain assumptions. The report shows some new thought to responding to DeMarco's concerns for taxpayer burdens and our real estate housing recovery.


"The most effective approach would be to offer principal forgiveness only to borrowers who were delinquent at the time the program was announced, thereby excluding borrowers who become delinquent in order to receive principal forgiveness. Another approach would be to forgive a portion of the borrower’s loan in exchange for granting the lender a claim on future equity or home appreciation — that approach is known as a 'shared appreciation' modification." ~ CBO Report.


Taxpayers Will Ultimately Pay Mortgage Principal Reductions


Taxpayers will ultimately have to pay for mortgage principal reductions. As of the end of 2011, taxpayers had already spent nearly $185 billion to keep the mortgage giants afloat.

While analyses show a benefit to the Enterprises from employing principal forgiveness, the benefit to taxpayers varies from negative to positive depending on the DTI distribution. This further illustrates the sensitivity of the model-based results to certain assumptions.


Underwater Mortgage Encouraged As "Strategic Default"


The report come to the point by saying, "The under-reported story through the housing downturn has been that despite the number of people underwater on their mortgages, the vast majority have continued to pay their mortgages, meeting their contractual obligations. For example, approximately 80 percent of the Enterprise’s underwater borrowers are current on their loans. However, despite most underwater borrowers remaining current on their mortgages, we have also seen borrowers default on their underwater mortgages without apparent disruption to their other financial obligation, and various commentators have actually encouraged such “strategic default.”


Strengthen Fannie And Freddie To Improve Housing Market


DeMarco's letters states his forethought and posture to strengthen Fannie Mae and Freddie Mac in that he "previewed for Congress several housing-related initiatives to strengthen the loss mitigation and borrower assistance efforts of Fannie Mae and Freddie Mac as well as improve the operation of the housing finance market." These initiatives include:

simplify principal reductions with new policies new and consistent policies for lender representations and warranties

alignment of principal reductions alignment and simplification of the Enterprise short sale programs 3) further enhancements for borrowers looking to refinance their mortgages.


DeMarco At Odds With Treasure While Looking "For Better Long-Term Underwater Mortgage Solutions


It is no light matter to go at odds with Treasury Secretary Timothy Geithner. DeMarco has support from high ranking Republican members of Congress, including Senator Bob Corker (R-TN),Representative Darrell Issa (R-CA) and Representative Spencer Bachus (R-AL). They concur with the logic behind his tough decision and continue seeking how taxpayers can best carry the burden of helping underwater homeowners. Along with several housing analysts, the American Bankers Association (MBA) has also taken a stance that defends DeMaco and continues to look for better long-term solutions that would make credit more accessible.


“FHFA has made the determination that the long-term national costs of a widespread principal reduction program are unlikely to outweigh what may be a short-term gain for a few select borrowers in certain states," declared David H. Stevens, president and chief executive officer of the MBA. "We agree that principal forbearance can help borrowers realize a payment reduction in a similar way as principal reduction. It is critical to implement solutions that help the American homeowner without incurring the negative long-term impact of making credit less available and more expensive."


“This should be positive for housing by taking off the table the threat of a wave of defaults by borrowers looking to get principal reduction,” Jaret Seiberg, senior policy analyst at Guggenheim Partners, wrote in a note to investors.


Don't Take Money From One Pocket And Put It In Another


The heat is so intense because DeMarco holds the key to Fannie and Freddie Mac along with 12 other home Federal Home Loan Banks. According to the FHFA, these agencies provide a staggering $5.7 trillion in funding for the U.S. mortgage markets and financial institutions including key lenders. Even with TARP funds possibly added to the mix, DeMarco holds his ground that it doesn't figure out productively to take money from one pocket and put it in another. It is important the homeowners can quickly understand employ alternatives to foreclosure. Homeowners can use Home Destination's Mortgage Worksheet to better prepare for a principal reduction request.


DeMarco's Concluding Remarks


"Existing Enterprise loss mitigation efforts provide opportunities for all types of underwater borrowers.
conclusion For borrowers who have the ability and willingness to pay there is HARP, which as the result of recent changes has been helping an increasing number of underwater borrowers.
conclusion For borrowers who do not have the ability but do have the willingness to pay, both HAMP and the Enterprises’ proprietary modifications provide at least as much monthly payment relief as HAMP PRA.
conclusion Finally, for borrowers who do not have the ability or willingness to pay, the Enterprises’ foreclosure alternatives, either through short sales or deed-in-lieu of foreclosure, provide an opportunity to exit their home without the harm to their credit standing that foreclosure produces."


First Seek A Reduction Of Your Home's Principal Balance


In states that don't allow mortgage lenders to sue borrowers for deficiency judgments (also called non-recourse states), you have more leverage. If you were to simply walk away from your mortgage and your home, your lender could end up much worse off than it would have if it proffered a reduction of your principal balance. Don't end up with a foreclosure on your credit report if you have better choices. Take action now; it is worth some concession on your part. The Federal Reserve Bank of Richmond classifies Alaska, Arizona, California, Iowa, Minnesota, Montana, North Carolina (for purchase mortgages), North Dakota, Oregon, Washington and Wisconsin as non-recourse states. Minneapolis homeowners may find that putting this option on the table may make your lender more open to reducing your principal balance.


Minnesota Homeowners Gain Principal Reductions


Jenna Thuening finds supporting evidence in daily engagements with Minneapolis homeowners that agrees with the evaluation of the National Foreclosure Counseling program. It is clear that homeowners are more likely to receive a home loan modification, on gain better mortgage terms, and remain in their homes when compared to borrowers who did not received housing counseling. Engaging the help of a professional Certified Distressed Property Expert (CDPE) can help you gain better home equity and /or reach needed milestones in achieving a principal reduction for your home.


Borrowers seeking Minneapolis homeowner help through the National Mortgage Settlement funds to correct under mortgages that may have been wrongly forecloses on, may call the Minnesota Attorney General’s Office at 651-296-3353 or 1-800-657-3787 or the Minnesota Department of Commerce at 651-296-2488 or 1-800-657-3602.



Download the letter DeMarco sent to Congress, including a review of underwater mortgage options and principal forgiveness. pdf

Download DeMarco's statement on The FHFA's decision. pdf


Download the FHA Reuest For Public Comments to Build New Infrastructure For Secondary Mortgages. pdf



National mortgage settlement related newsJenna Thuening understands depleted equity, and helps home owners determine foreclosure eligibility, negotiating a successful short sale, and helping you understand foreclosure and short sale terminology. If you are a homeowner and prefer meeting in-person to ask questions about your underwater mortgage or principal reduction, call Home Destination today at 612-396-7832.





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