Principal Reduction: Fair or Welfare?

For those ideologues who blindly call for “personal responsibility” we direct your attention to the tens of billions of subsidies (corporate welfare) given to hundreds of corporation, some of whom act contrary to the interests of the American citizen and U.S. Foreign Policy. Either take the blinders off or admit that you don’t care about the facts. In the last year we gave more money from taxpayers to large corporations than all the social programs combined including social security and medicare and medicaid. Isn’t THAT welfare?

Principal reduction is fair and practical and proper. The failure of attempts to encourage modifications and mediated settlements can be traced to a few simple facts. First, the companies being encouraged to modify or mediate the bloated loan packages sold to homeowners and qualified investors, don’t own the deals. They don’t have any authority and they make more money keeping the loans in default and foreclosing than they could ever make by modifying the loans.

[So if you want a law that actually accomplishes anything, then you would require that those who would attend modification conferences be authorized to make decisions. A mediation process would be preferable because it would require the parties to prove their identity and relationship to the transaction]

Second, principal reduction is actually a misnomer. It should be called fair market valuation. The property was not and never will be worth what it was appraised at, so the mortgage on it will never be worth its nominal value and the investment package purchased by institutional investors as mortgage backed bonds are correspondingly worth far less than how they were rated or valued.

The correction for this fraud is to adopt plans that place the victims as close to their original position as possible before they were tricked into this scheme. Tactically, that would be easiest if the borrowers and the creditors (institutional investors owning MBS) got together, sued the intermediaries who caused all this, collected the proceeds of Federal bailouts, and used it to make the investors whole and force the accounting for the notes and mortgages to be reflected as fair market value.

Sure the homeowners who get a “benefit.” But it is a far cry from welfare when you give back what was taken through deceit. The government is far behind the curve on this and the situation is going to get far worse as people walk from the securitized debt because they can. Why should a homeowner, auto owner, student debtor or credit card debtor pay a party who never advanced the money? Free? No, it would be proper to take the interests of investors and their real debtors into account and develop a formula to return equity to the homeowner and money to the investor.

6 Responses

  1. Part of the problem is that the default loans with balances owed that are larger than the property appraisal are no longer securities. Securities are for performing current assets. Once a loan is in default it is no longer a performing current asset – and no longer a marketable security. When the default loans are removed from the original trust, the loans are sold at a steep discount to distressed debt buyers/hedge funds/private equity funds. Any principal reduction for delinquent homeowner will spoil the profit potential for the debt buyer. Debt buyers are making a bundle and they are not regulated. We do not even know who these people are, but the government loves them.

  2. HUMMM. This sounds like another smoke and mirror ploy, until the “investor class” can figure things out! In reality which bank will get the next taxpayer bail out when they are forced to take toxic assets back on their books.

    What are the percentages here, how many under water home owners have a JOB, or if they have one how secure is that JOB? How will people qualify for a “write down”? What will be offered to an individual that is not in a sub-prime loan, has high equity to loan obligation and is just struggling with their obligation due to job loss or under employment, some who are small business owners, who were hit broad side by this voodoo financing.

    In my personal opinion there is a limit on how many foreclosed properties a “pretender lender” and or investor can hold on the balance sheet when people are out of work or under employed and will be held to stringent lending standards. Remember them!

    Apparently the FDIC is well aware and panicked, when the toxic assets are put back on the balance sheets at the banks they insure the true nature of this “securities” mess will be exposed for what it really is, requiring another tax payer bailout. And not just to the bank’s but the local municipal governments that bloated their spending and governments gorging on the income from higher property assessments.

    In the end if an individual sees cause for action in their particular situation then so be it. But there are plenty of people out there that will have no recourse or relief under this proposal and quite frankly when they are finally decimated there will be no more taxes to collect.

    Just my 2 Cent’s!

  3. One more thing. I had a local Banke here fight me for 3 years. I finally gave up. They got my house that I had invested $30K in, a lein for $10K and a $130K judgement. They turn around and sell the house to one of their buddies for $15K. I wish I had an attorney in Racine, Wi.. Anybody??? I can’t do everything.
    Stanley Putra
    Racine, Wi.

  4. Principal reductions are a part of Business. I have gotten many loans where the appraiser was hired by the Bank. A true Businessman just wants people to pay. Look at Wells Fargo. How much money are they wasting fighting people like me and others.

    Stanley Putra
    Racine, Wi. USA

  5. Principal reductions towards market valuations only signals the aftereffects of appraisal fraud. There is a blog on here that reflects several appraisers and real estate agents in California being sentenced soon for appraisal fraud for over-inflating home prices. If the fraud was committed when the notes were securitized, then the entity creating the security places itself in an awkward position when having to defend a mortgage fraud case brought by the homeowner. The pretender lender does NOT have the authority to create new paperwork on top of what they’ve already created to securitize the mortgage the borrower wants modified. The only option to the borrower is to sue under the state Deceptive Trade Practices Act at the first whiff of contract breach (due to lender failure to renegotiate) and to foreclose on the pretender lender by making him prove he doesn’t own the note! Remember the old saying, “You can’t prove a negative” ??? In discovery however, one could prove the lender recreated the note for securitization purposes and have the entire contract voided by the court. I would think that would be better than strategic default to force the pretender lender into court as a Plaintiff in foreclosure commencement proceedings.

  6. Don’t forget about the concept of mark to market. Whenever a securitization “deal” sells, the banks have to mark the value of the assets to the current market value. This only occurs when you have a sale. So, theoritically at least, they are supposed to be marking these assets down anyway (depending on what they actually have on their books and how they are actually accounting for it). But it is the truth. The house is only worth what the market will bear. And right now, if they foreclose on your house, they will buy it back for way below what you were probably loaned (depending on your loan and the market in your part of the country). And that is a “fake” sale because they do not actually pay for it. When it goes on the market and sells, that is the “real” market price. I don’t know about your area but in my area these homes have been on the market for a long, long time and are not selling.

    Here is the other truth. The “intermediaries” foreclosing on the properties would rather take 40% of the properties worth by having a foreclosure sale from taking 60% offered by homeowners. And after the 40% they will get at a foreclosure sale, they still have to sell it on the open market and adjust for their costs ($50,000+).

    Why would they deliberately lose 20% + $50,000 minimum in fees in order to foreclose?

    Of course this is a rhetorical question because I already know the answer.

    Dan Edstrom

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