Principal Reduction or Principal Elimination

“Many economists and mortgage experts have concluded that banks must ultimately forgive loan balances to restore equity to underwater borrowers. Otherwise, growing numbers will walk away from their homes and accept foreclosure rather than make payments on properties in which they no longer own a stake.”

Editor’s Comments and Notes: The Obama Administration has finally come to the conclusion that we all knew a year ago — modifications won’t work because the wrong people are involved and because they can’t work without either elimination or reduction of so-called principal balances.
The choice is simple. Reality is clear. Most of the second mortgages or HELOCs will never get paid. Many of the first mortgages won’t get paid either because people are starting to walk away — simply to rent or buy another home at a real price with a real mortgage and real rates requiring real payments that are vastly lower than what is demanded by these fraudulent mortgages originated over the last 10 years.
The method was simple. Take a $100 investment and buy a mortgage for $50. Keep the balance. That is what they did. And that is why they won’t show the paperwork to the investors and why they won’t reveal the identities of the investors (i.e., the “creditors”) to the homeowners.  It is also why Katherine Ann Porter at the University Iowa found that 40% of the original notes were lost or destroyed. When someone (investor) wants to see the $100 mortgage they bought, better to say you lost it or it was destroyed and start creating fabricated documents than to come right out and say I took your $100, paid $50 for a mortgage, and kept the money. And oh by the way the mortgage I funded is only worth $25, after expenses and a distressed sale you’ll be lucky if you net $15.
What’s that? You want to know about the insurance on the mortgage? Well that wasn’t paid to me it was paid to some other entity that was trading and betting on the failure of that mortgage. The $3,000 paid from AIG was pocketed by Goldman Sachs and you don’t have any right to that.
So write off the loss to a history lesson and forget about it. besides, you must have known that these were bogus mortgages. You’re a sophisticated fund manager. You got your bonus. Just move on.
Meanwhile I’ll clear up the paperwork mess on this. I’ll start foreclosure proceedings, take the property, keep the proceeds if I sell it and you won’t be any the wiser because you don’t even know I used your creditor’s claim as though it was mine. What business! I’m happy. Most of these homeowners don’t know what them. They just walk from the property and leave the keys on the kitchen counter.
I’ll go through agents and foreclosure and repossession companies, they will hire lawyers where necessary and the low hanging fruit —- 97% of all the mortgages will fall right into my basket. I give them their cut and I keep the balance. And if I have a friend who needs a house I’ll sell it to him real cheap because he’ll do the same for me next week out of his inventory.
To hell with the country. As long as I’m making money I’m being a good American.
January 22, 2010

Treasury Weighs Fixes to Foreclosures Program

The Obama administration plans next week to revamp its $75 billion program aimed at sparing homeowners from foreclosure, streamlining the documents required of borrowers seeking lowered payments, according to financial industry executives and others who have met in recent days with Treasury officials.

The latest effort to accelerate the Making Home Affordable program — now widely viewed as a disappointment — comes as the administration faces growing pressure to do less for banks and more for households struggling with double-digit unemployment.

The changes by the Treasury Department are expected to include greater assistance for homeowners no longer able to make mortgage payments because their paychecks have shrunk, said banking industry representatives privy to the department’s deliberations who spoke on condition of anonymity for fear of alienating government officials.

The Treasury was still debating the method, these banking representatives said, looking at either direct cash assistance or a grace period in which borrowers could postpone payments. That component may not be announced next week, but would follow soon after.

Housing experts said the anticipated changes would probably cause mortgage companies to move more quickly to lower payments for borrowers, though perhaps at the cost of prolonging the foreclosure crisis. Requiring less documentation of borrowers’ incomes carries a risk of lending to people who simply cannot afford their homes, increasing the likelihood of subsequent delinquency.

“They are turning this from a legitimate program to try to save people who have the ability to hang on their homes into one that says, forget the willingness and ability to pay, let’s just postpone foreclosures,” said Edward Pinto, a mortgage industry consultant who served as chief credit officer at Fannie Mae in the late 1980s.

While declining to provide details, the Treasury confirmed its plans to alter the program at a meeting next week with mortgage companies — servicers, in industry parlance.

“We expect to issue guidance to servicers next week to expedite conversions of current trial modifications and provide guidance on documentation,” the Treasury’s assistant secretary for financial institutions, Michael S. Barr, wrote in response to a reporter’s questions. “We are continually reviewing our housing plan to ensure that it promotes stability.”

The changes to be introduced next week are unlikely to address what has emerged as a potent factor propelling a wave of foreclosures: the roughly 15 million borrowers who are said to be underwater, meaning that they owe more than their homes are worth. But the Treasury is actively considering ways to attack this problem, financial industry representatives said.

Many economists and mortgage experts have concluded that banks must ultimately forgive loan balances to restore equity to underwater borrowers. Otherwise, growing numbers will walk away from their homes and accept foreclosure rather than make payments on properties in which they no longer own a stake.

The Treasury has resisted calls to push lenders to write off loan balances, concerned that such a course would either threaten the health of banks by forcing them to swallow billions of dollars in write-offs or cost taxpayers additional money.

The administration has instead focused on ramping up its existing program, which pays mortgage companies that lower mortgage payments. The vast majority of loan modifications to date have lowered payments by dropping interest rates while leaving balances untouched.

When President Obama outlined the program nearly a year ago, he said it would prevent three million to four million foreclosures by 2012. As of December, mortgage companies had modified 759,000 loans on a trial basis, typically lasting three to five months. But only about 31,000 homeowners had received so-called permanent loan modifications, which lower payments for five years.

“There’s a great degree of frustration about how this has been going,” said Alan M. White, a professor at Valparaiso University Law School.

The changes expected next week are intended to alleviate one roadblock: the voluminous paperwork mortgage companies must process to qualify borrowers for lower payments.

Homeowners complain that mortgage companies routinely lose their documents, forcing them to repeatedly resend files. Mortgage companies have acknowledged problems, while also blaming homeowners for failing to provide required documents.

The Treasury is likely to alter the program by making pay stubs an acceptable means of verifying income, rather than requiring tax documents, said the people close to the deliberations.

One reason that mortgage companies are having such difficulty processing paperwork, they acknowledge, is that they lack adequate experience. During the housing boom, major institutions like Countrywide (now part of Bank of America) and Washington Mutual (since folded into JPMorgan Chase) marketed themselves as easy lenders motivated to approve mortgages with little fuss. They specialized in mortgages that required little or no documentation, sometimes called liar loans, which led borrowers and mortgage brokers to exaggerate incomes and assets.

Some experts fear that the Obama administration is now so eager to slow foreclosures that it is willing to employ the same sorts of loose lending standards that delivered the crisis.

“It definitely does lead to the question, are they substituting liar loan modifications for liar loans?” Mr. Pinto said.

Consumer advocates welcomed the prospect of a new effort aimed at accelerating loan modifications, while questioning whether the proposed changes would be significant.

“The results are dismal so far,” said Julia R. Gordon, senior policy counsel for the Center for Responsible Lending in Washington. “We need a game changer.”

Throughout the financial system and within government, a sense is taking hold that the only effective way to stem foreclosures is to write off loan balances.

“We realized early on that if we don’t include principal treatment, you just don’t get the buy-in from the borrower to stay with it,” said Paul A. Koches, general counsel for Ocwen Financial, a major mortgage company that claims conspicuous success in converting trial loan modifications to permanent arrangements.

As of mid-December, Ocwen had turned about 40 percent of its trial modifications into permanent arrangements, according to the Treasury. By comparison, JPMorgan Chase had converted only 4 percent of its trial loan modifications into permanent status; the rate was less than 2 percent at Bank of America.

Servicers merely collect mortgage bills for a fee. Most loans are owned by investors. They are increasingly inclined to accept losses by writing down loan balances in exchange for greater assurance that borrowers will be able to make payments.

“Investors are willing to put real money on the table toward refinancing borrowers from bad mortgages into good mortgages,” said Micah S. Green, a partner based in Washington at the law firm Patton Boggs, who represents a consortium of institutional mortgage holders.

The Obama administration has begun to consider a new push to reduce loan balances, while debating the proper mechanism, according to banking officials.

“They are looking at equity forgiveness,” said a financial industry executive who speaks regularly with Treasury officials. “There have been a lot of meetings on that.”

But the details are messy, requiring a complex balancing of competing interests. Not least, the owners of first mortgages are unwilling to accept losses by writing down loan balances unless the pain is shared by the owners of second mortgages.

Many second mortgages, including home equity loans, are owned by the very banks that are in the middle of determining whether and how to modify first mortgages — servicers like Bank of America and Chase. For them, taking losses on second mortgages would entail stripping away billions of dollars in assets from their balance sheets.

“The banks are kind of in denial that second mortgages aren’t going to get paid in full,” said Professor White of Valparaiso. “Treasury has to find a way to compel the banks to take a hit.”

7 Responses

  1. What should I do with a Bank that was taken over by the FDIC. After fighting the Bank for 3 years they took 3 houses. Even though the Bank foreclosed on me for $140K on a house they sold the house for $15K to one of their buddies. What can I do . They have a congressional Commission investigating these Crooks
    Racine Wi

  2. The banks contribute to the delays by slowing down the hiring of people to do the loan modifications. As a recruiter I have submitted well qualified people with years of loan modification and loss mitigation experience and the companies like Freddie and Fannie do not even call them for a interview after having the resumes for 2 plus months. The hiring managers collect their pay checks and could care less of how they do the job

  3. “Mortgage Modifications” are a scam designed to con the borrower into SIGNING ANOTHER PROMISSORY NOTE AND MORTGAGE/DEED OF TRUST, because the pretender lender doesn’t have any that will survive a properly prepared and professionally presented challenge to a foreclosure complaint.

    The BIGGEST MISTAKE anyone can make would be to sign up for a “Mortgage Modification.”

  4. FWIW – Countrywide / BOA assigned many of their second mortgages to some company called Real Time Resolutions. So they may alreasy be wriiten of on the CW/BOA side of things only to have a new entity try to collect an uncollectable debt.

  5. Since the principal was created out of nothing by the warehouse lender before being loaned to the
    correspondent lender, who then took about 15% off the top(YSP) and jacked up the interest by one or two points before lending it to the consumer, why not just call a moratorium on the interest and just have the consumer pay back the principal, which was the only
    money actually created by the loan. The interest was
    never created and therefore, can never be paid back.
    In my view, merely reducing the principal and interest rate will not solve the problem and is too complicated. It would be much simpler for Ceasar to
    issue an executive order putting a moratorium on all
    interest on loans made between 2001 and 2008.

  6. I like the editorials in yellow, and I believe them. But I sent in my request for a loan audit over 6 months ago. I noted that I was planning on getting a lawyer on the “get it” list. She states that she already requested the audit from your group in August last year. Does it really take that long to get the information to prove the title chain, and other aspects of the audit? I want to believe, and I’m fighting the good fight, but I’d prefer to have a good case to keep my home instead of a good case for damages after losing it. Any help in that part of your operations would be awesome. In the meantime, kudos and gratitude for the site and for spreading the word.

    (The last two months I’ve been showing up to the courthouse to advise potential bidders about my court case, so they can’t claim to be innocent uninformed third parties, and I’ll be there again in a few weeks.)

  7. I think we all know what loan mods are really about; it’s just one more sadistic step the “lenders” use to bleed every last drop of blood out of you before they steal your home. God bless America; land of the thieves and home of the slaves.


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