Foreclosures, banking and housing woes are front-page news almost every day these days. The subject has caught up with the War In Iraq as the most important battle in public attention.
Today’s WSJ discusses the prospect in it’s lead article that lenders could be compelled by the Feds to reduce principal balance on troubled loans where current loan balances exceed the value of the home.
Why would lenders do that?
The only REASON (as in “reasonable”) would be to avert more losses that would come about by taking more homes from the owners and turning them into non-performing assets on lenders’ balance sheets.
So, instead of taking larger losses later, lenders would just give it up to the home owner - to motivate them to make payments on the loan as long as they can still afford that.
Who is holding the bag?
Investors who put up the money for these loans are supposed to take the losses rather than the home owners. Should there be a differentiation between home owners who took out equity by way of refinancing? As opposed to owners who bought at bubble-inflated prices? The later never “owned” much of their homes - if any - to begin with. Whereas the refinancers took cash out of the home mistaken for a piggy-bank.
What about home owners who didn’t take out that much equity, or who didn’t pay that much for their house to begin with? Is it unfair to them if their overleveraged neighbors’ loans are partially forgiven?
And what about future appreciation?
Few people think that lower housing prices are here to stay. Even in highly volatile areas, where real estate cycles can bring price adjustments of 20% or more, the overall trend is always up.
So, at some point in the future - and most likely BEFORE the final due date of the loans that are now in question - home values will recover and exceed today’s loan balances again.
Will the Feds compel those home owners that had their principal balances reduced to agree to raise the balances again?
1 response so far ↓
1 LSH // Jul 24, 2008 at 10:20 pm
My daughter is a homeowner in this situation, what put her in this spot was being the victim of domestic violance and having to payout her now former spouse when the housing values were at their very highest. Not only did she pay through the violence, but now she is on the verge of being foreclosed on. She has a home that is now worth about 1/2 of what she owes. So she and her babies are hoping to have her lender reduce the balance of her loan, but we can’t get them to even discuss anything let alone reduce the loan balance. They want her to take the 3 payments she is behind, divide that $9k by 12 and add that amount to her $3200.00 per mo payment, so as they say she can get caught up…Does anyone have any ideas, or has anyone even heard of a lender reducing the loan balance in this type of situation.
Help. Oh yes, we have sent this request to the lender, including police reports, etc. we have gotten no response, we even sent this to the Gov. of California, Senator Diane Fienstein, etc, we have never heard back from any of them. So much for the government officials wanting to help. Oh thats right, it is an election year, they must be either to busy or on vacation. You would think they would at least send something back saying they were looking into it, or at least thanking us for our letter.
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