Banks Insist Principal Reductions Will Not Help The Housing Market
Last week, President Obama and his administration proposed a plan to settle with banks plagued by robo-signer concerns. Among other things, the settlement included an agreement on the part of the lenders saying that they would either pay around $20 billion in civil fines or that they would fund a comparable amount of loan modifications, including reducing principal on those loans[1]. Not only do lenders say that this settlement will “bring…enormous costs that would far outweigh any potential benefits,” (according to BofA mortgage strategist Chris Flanagan), but they also believe that in the grand scheme of things, that $20 billion “would accomplish little” in dealing with the $744 billion dollars in underwater mortgages around the country.
Unfortunately, lenders do not appear to have a return proposal that is a viable solution to the massive lack of trust – and the lost faith on the part of the consumers and investors – in today’s housing and lending markets. While the Obama administration’s proposal is fraught with perils – attorney Gloria Einstein points out that “requiring banks to eat the loss and at the same time allowing them to administer the program is a recipe for a program that will not do anything except raise people’s expectations and frustrate them,” just for starters – lenders are going to have to deal with the myriad problems that permeated the lending industry for years prior to the housing crisis and that were brought to light last fall. Do you think that the administration’s plan is workable? Is it even enough?
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[1] http://online.wsj.com/article/SB10001424052748703905404576164870685407618.html?mod=googlenews_wsj
How is it the banks say Principal reductions will not work when they are willing to reduce principal drastically in the case of a short sale or a foreclosure!?! Talk about two-faced! Talk about double-speak! Principal reduction is the ONLY solution that will work! A determination of current value should be made by a qualified (and I do mean QUALIFIED) appraiser familiar with the LOCAL market and LOCAL market conditions, (not appraisers from the ‘appraisal mills’ currently being used by banks that know NOTHING of local conditions) and then the same methods should be used to qualify the current homeowners’ ability to pay the mortgage going forward as would be used for any other buyer. If they can afford to stay in the home at current value and current interest rates, then they should stay and reduce the excess inventory. If not, then the home should be sold in a short sale or the bank should be forced to take it back via deed in lieu of foreclosure. After that someone has to help these people find adequate and decent housing. As a realtor I know how difficult it is to convince landlords to take these displaced homeowners even though it may not even be their fault they lost the home. BANKS MUST BE HELD ACCOUNTABLE TOO!
“Do you think that the administration’s plan is workable?”
Entertain the following thought for a moment. Why do crooks get caught
even after they have made the big score? Because they just can’t walk away from a good thing.
The banks just don’t know when to quit the game they’ve been playing all these years.
A real solution is coming from where the Banks expected it. The courts are finally growing a set of stones…and calling the bank shenanigans…by it’s real name…fraud upon the court.
What’s my crystal ball saying? The Ibanez case out of the Massachusetts Supreme Court will finally cook the lender’s goose anyway…as more and more investors realize…they were rooked.
The administration should give the banks an option: take the deal or face securities fraud charges.
If the banks take the deal…the real estate market stabilizes overnight…downward…but it stabilizes.
If the banks don’t take the deal…well…see you in court with all those fines and jail time.
I have to give the Obama administration some credit for taking initiative on this one. Clearly, they lack sufficient expertise in-house to administer the program, and they probably would have taken more flack had they suggested that they administer the program. So proposing that the banks administer the program-and cover its costs-is a savvy political move.
The banks are facing at least $20B in civil fines due to the damage that they caused with the robo-signer fiasco. IMHO, the write-downs give the banks an opportunity to save face; the alternative is to let the banks duke it out in court individually with all of the counter-parties and risk receiving punitive damages in addition to those fines.
They have very little (if any) leverage. It’s time for them to bite the bullet, or bite the dust.
I think the Obama administration’s proposal is supposed to feel good but it won’t accomplish anything that will benefit the American people. First, fining Banks $20 billion will hurt consumers more than banks. They will find a way to get that money back in the form of fees and hidden charges. It’s like when property taxes get raised, does it affect the ‘rich’ real estate investor or the renter? If property taxes go up by $25/mo, then rents increase by the same amount, so the wealthy aren’t affected by these increases, the renters are. Same philosophy will apply to fining banks. It may look good, but the ultimate punishment will fall to the American people.
Second, all of these loan modifications and principal reductions are worthless. People will keep their houses if they have jobs that produces an income. If you’re under employed, modifying a home loan isn’t doing you any good. The Govt needs to focus on giving tax cuts to local businesses hiring Americans instead of giving money to the banks for these loan modification.
Principal reductions don’t make sense. The only time an underwater mortgage is a concern is if the seller is trying to sell. If this is the case, negotiate a short sale with the bank. Banks will work with sellers who are current on their payments but trying to sell a home in which they owe more than it’s worth (i.e. don’t stop making payments and trash your credit just to qualify for a short sale). Therefore, principal reductions shouldn’t be part of the plan and our tax dollars definitely should not be going towards this plan.
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