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January 30, 2012

More incentives for principal reduction

The Treasury Department is trying to get more mortgage servicers to reduce the principal of struggling borrowers by tripling the incentive it pays for such a move -- and offering to pay financiers Fannie Mae and Freddie Mac, too.

Fannie and Freddie are essentially government-owned. As you can imagine, this new twist strikes some as the equivalent of Uncle Sam tossing money from his left hand to his right.

Of course, calls by Congressional Democrats for more principal reduction have so far had no effect on Fannie and Freddie, never mind their ownership status. Their independent oversight agency insisted shortly before last week's Treasury announcement that "principal reduction never serves the long-term interest of the taxpayer when compared to foreclosure." (The Federal Housing Finance Agency said Friday that it will do another analysis to account for the new payments.)

The deal being offered: For every dollar knocked off a borrower's principal, Treasury will fork over between 18 and 63 cents.

A state task force recently recommended principal reductions in which homeowners, in exchange for no longer being underwater, would agree to share any profits if they sell or refinance during the following nine years. Shortly before Treasury made its announcement, I chatted with a local loan officer who thinks the financial industry will have to move in that direction.

"There has to be some sort of partnership or some type of understanding between homeowner and lender now that 'we have a problem here, so what are we going to do about it?'" said Robert Nusgart, a senior loan officer at the Baltimore office of Mortgage Master, a correspondent lender that makes loans and then sells them to banks. "It's a matter of coming up with some realistic solutions on both sides."

He added, "A lot of people have gotten hurt. They have handcuffs on their hands because they can’t do anything. They can't refi; if they sell, they're going to take big losses. ... If there's something that can be worked out, work it out."

Nusgart -- The Sun's real estate editor from the late '90s until 2002, as it happens, which is before I took over the housing beat -- said another recommendation from the state task force that seemed particularly useful focused on how mortgage servicers should work with homeowners trying to avoid foreclosure.

Rather than make borrowers talk to different representatives every time they call in for an update, to see if paperwork was received or to figure out why they were denied for help, servicers should appoint a specific person (or a very few, at most) to work with each homeowner all the way through, the task force said.

"I get calls all the time from frustrated people -- 'what do I do?'" Nusgart said.

You might get lucky when you call in and just "happen to get somebody who knows what they're doing, knows what they're talking about and gets you on track," he said. But too often homeowners are just bounced around from one staffer to the next, making little progress and getting conflicting information.

He pointed out that people about to purchase a home or refinance aren't passed from one loan officer to the next like a hot potato. That constant switcheroo "is terrible service," he said.

Posted by Jamie Smith Hopkins at 6:00 AM | | Comments (1)
Categories: Mortgages, The foreclosure mess


It is hard to imagine that the principal write down generates a greater capital loss to a lender than losses sustained as a result of a foreclosure. It must be the "new math".

Unless the analysts are clairvoyant, it is impossible to forecast the potential losses absorbed following a foreclosure. Property values could go up or down. However, we know that during a foreclosure cycle, the bank receives no interest or principle payments, is obligated to pay real estate taxes, pay for property and maintenance/emergency repairs. In addition, upon sale, the lender pays real estate commissions, also reducing the net proceeds of sale.

With 25% of the country upside down in their homes,it seems prudent to come up with alternatives to foreclosures for those who are not destitute "yet".

Principal foregiveness, (with an equity kicker), restructuring of loans, access to refinancing are all worth investigation.

I cannt envision any scenario in which the government loses less capital through a foreclosure than losses it may sustain through one of these other options.

I will have to read the study, I guess

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About Jamie Smith Hopkins
Jamie Smith Hopkins, a Baltimore Sun reporter since 1999, writes about the regional economy. Her reporting on the housing market has won national and local awards. Hopkins is a Columbia native and has lived in Maryland all her life, save for 10 months spent covering schools in Ames, Iowa.
She trained to become a wonk by spending large chunks of time as a geek and an insufferable know-it-all.
Baltimore Sun articles by Jamie

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