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principal reduction loan modification Fannie Mae and Freddie Mac Disallow

Buttercups!

Buttercups!

principal reduction loan modification Fannie Mae and Freddie Mac Disallow

 
News Alert
from The Wall Street Journal
The federal regulator for Fannie Mae and Freddie Mac will not permit the taxpayer-supported mortgage giants to participate in an Obama administration program that reduces mortgage balances for certain troubled homeowners.
The Treasury Department, which had put heavy political pressure on the Federal Housing Finance Agency to permit the companies to participate in a limited program of debt forgiveness, immediately responded by questioning the regulator’s assumptions and asking the agency to reconsider.
 

Today, the Wall Street Journal announced that Fannie Mae and Freddie Mac will not allow mortgage lenders to reduce mortgage loan balances on their loans.  This is a shock to some people, but not shocking or surprising to me.  A lender simply has no benefit in reducing the balance of a mortgage loan.  If they do this, then they subject all mortgage loans to being subject to the same modification for the same reasons.  This means that practically no mortgages would ever be foreclosed, instead mortgages would be reduced to what “people can afford”.  While this seems like a good thing – think again.  If a bank cannot count on the legal and financial stability of absolute security in their loan balances, they will have to build this uncertainty into loan pricing – i.e. higher interest rates.

Right now – nobody seems to care about loan pricing because “life is good” with interest rates less than 4%.  Guess What – the last time we had this type of rate – it was 1934 and the height of the great depression.  Just think about 1980 when interest rates were 21% on mortgages.  Trust me….at that time, people will be happy that the sanctity of loan agreements has been preserved.

Conclusion:  Every underwater mortgage in this country that no longer seems justifiable or payable by the borrower will be foreclosed.  Only those homeowners who treat their homes as tools will remain.  I would estimate that by the end of this second great depression we will see at least 50% of all underwater mortgages go into foreclosure if not more.  However, for those who value their home as a tool, I would estimate that none will go into foreclosure except those cases where borrowers become ill, disabled or unemployed.

Recommendation:  I strongly recommend that Congress Amend the Bankruptcy Act to allow mortgage loan balances to be modified in adverserial proceedings within a Chapter 13 and Chapter 11 Proceeding.  This will allow court supervision of loan balances and allow for the integrity of loan agreements to be preserved.

Write your congressman today and ask them to support amendments to the Bankruptcy Code that give real debt relief to homeowners.  For more information, visit the National Association of Consumer Bankruptcy Attorneys at:  www.nacba.org for this ongoing effort.

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