Lenders May Cut Borrowers' Principal to Prevent Costly Foreclosures
Several years ago, it would have been virtually unheard of.
But a number of lenders are now sometimes willing to consider reducing or deferring part of a borrower’s principal balance on an upside-down mortgage in order to avoid taking an even more costly hit if the loan goes into foreclosure and has to be sold at a significant loss, according to Bloomberg.
At the same time, however, infighting among primary lenders and home-equity lenders can make it difficult to agree on terms if a homeowner has multiple loans. Likewise, the holders of mortgage-backed securities may not be happy about a principal reduction. And banks themselves see mortgage principal cuts as a problem, since they force an immediate loss write-off that could, if enough mortgage principal reductions are made, force the lender into insolvency, the news agency reports.
In one such situation, Marcus Beckett, 42, reduced his monthly payment from $2,413 to $1,314 after OneWest Bank agreed in October to defer $66,000 of the $423,000 he owes on a two-bedroom California condominium purchased in 2006. (The article doesn’t explain what other concessions, such as an interest rate reduction, presumably must have been made to achieve such a substantial change in his monthly payment.) He will still owe OneWest the $66,000 when he sells his home.
“We offer a principal reduction if that makes sense for that individual borrower’s situation,” Franklin Codel tells Bloomberg. He is chief financial officer of the home-lending unit of Wells Fargo & Co., which last year cut $2 billion in principal from borrowers’ loans.
Meanwhile, observers worried about the millions of borrowers believed to have upside-down or underwater mortgage balances that exceed the value of their homes have been calling for the federal government to step in and put pressure on lenders to make such principal reductions before the situation potentially worsens a housing market already devastated by excessive lending.
A growing glut of foreclosed homes could drive property values down nationally another 10 percent this year, resulting in a 40 percent total drop since 2006, states a New York Times editorial this week. And the more values drop, the more homeowners who see that they have no equity in their homes, despite hefty monthly payments, will be tempted simply to turn over the keys to their lenders and take the hit on their formerly good credit. Indeed, it’s surprising that more haven’t already done so, another Times article implies.
“To avert the worst, the White House should alter its loan-modification effort to emphasize principal reduction. Job creation should also be a priority so that rising unemployment does not cause more defaults,” the newspaper writes, saying that true economic recovery cannot occur until the housing market stabilizes.
In theory, lenders may have a legal remedy against defaulting borrowers, but as a practical matter, pursing former homeowners for damages is likely to be a difficult venture, as discussed in earlier ABAJournal.com posts.
Related coverage:
ABA Journal: “Battle on the Home Front”
ABA Journal: “The Bad-Debt Blues”
ABA Journal: “The Pain Spreads”
ABAJournal.com: “Judge Cancels $525K in Mortgage Debt, Blasts Bank’s ‘Shocking and Repulsive’ Acts”
ABAJournal.com: “Boston Lawyer’s Suit Over Unaffordable Loans Could Be a Model”
ABAJournal.com: “Lawmaker to Lenders: Modify Mortgages, or We’ll Revive ‘Cramdown’ Bill”
Updated at 8 p.m. to link to additional New York Times article.
