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Mortgage lenders now more inclined to lower principal

The home loan industry has been steadily resisting giving homeowners any principal reduction breaks throughout this real estate inferno.The government has been all over it to do mortgage modifications at a reasonable clip in an effort to keep the foreclosure epidemic from getting out of control. The banks have been slow in helping out even with them. The ones they have channeled through have generally been rather tame, all too often leading the borrower to redefault within months.

Mortgage loan providers, banks and investors that is, have obviously decided to change course somewhat.In a fresh report from OCC, or the Office of the Comptroller of the Currency, a regulator of national banks, the numbers show that in the first quarter 3.1% of loan modifications included principal cutbacks. More importantly, in the second quarter it had jumped to 10%. The report offered little information on how much of a reduction was done on an average. Still, the implication is that more of the same should be coming.

The real estate market continues to struggle and mortgage foreclosures threaten to go on, or even grow, at an alarming pace.Banks must have realized that a meaningful rebound is still a distant dream, and even if it comes soon, it predictably will be a gradual one. Therefore, to cut their losses a principal reduction increasingly appears to be the thing to do. It doesn't have to be all the way down to current market. As long as it is large enough to keep the homeowner in his residence with an affordable mortgage payment, both sides are likely to end up winners.

Southern Nevada - Las Vegas, Henderson, Anthem, Summerlin, Green Valley, Southern Highlands and Mountains Edge among its communities - homeowners would be some of the major beneficiaries of this shift in thinking. Scores of them are underwater here and are straining to hang in there with high mortgage payments. Many have decided to walk away from it, just handing the keys back to the lender. This development, by the way, probably is also weighing in on the banks' decision making. Although there are no stats to back it up, it is easy to see that the hard-hit areas, like Arizona, California and Florida, Nevada's partners in crime, are getting more attention tied to this issue than others.

Many banks are now in a better financial position to loosen up their strategic thinking. The siege mentality seems to be lifting. Some have even been able to raise new capital to start tidying up their demolished balance sheets. This new direction, as long as it holds, will also assist in keeping Congress from enacting the cram-down legislation, rumored to be still alive and kicking.

Realistic thinking appears to be making a comeback to the mortgage marketplace.

_______________________________________________________________________________

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Esko Kiuru
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Home loans in Southern Nevada - including Las Vegas, Summerlin, Henderson, Green Valley, Mountains Edge, North Las Vegas, Southern Highlands, Anthem, Boulder City, Pahrump and Mesquite - and all of Nevada.

Posted by Esko Kiuru - Las Vegas NV Mortgage Consultant on 10/03/2009 06:47 PM

Comments (70)

Mortgage Market Commentary in the Mortgage / Finance Channel

mortgage, las vegas, home loan, henderson, occ, anthem, real estate, summerlin, foreclosure, southern highlands, homeowner, nevada

Originally posted at: The Mortgage Market Watch and Interest Rate Lock Advisory: Mortgage lenders now more inclined to lower principal

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70 Comments on Mortgage lenders now more inclined to lower principal

OCT

Thanks for this info. I have been involved in a number of loan mods for my clients and just 1 involved a mortgage roll back ($100K) from $468K to $368K and a reduce rate loan from a terrible neg am to a fix at 4.5%. The roll back brought the loan to house value and the reduced payment made sense for the borrower to stay. They have been paying on time without a late for 6 months now.

I said this back when all this first started the lenders needed to so a modification or at least keep the same terms on the 1-3 year low adj rate and not adjust. This would have slowed the crash but the problem was the investors of the banks who purchased the paper. They should have had more sense as this has been so harmful to so many.

As a Probate Agent it hasn't hurt my business to much as regardless if the house was worth $600 3 years ago and only $400 now, it's still free money. Probate Real Estate hasn't been hurt to bad even with the roll back in prices. Nice article, thanks... www.probate-realestate.com

Jeff, I don't know, I have real mixed feelings about decreasing loan principles. It does not seem fair to those that are making their monthly payments and will not receive the same. I understand the reason for doing it, but I do not see the fairness in it.

Esko - While some may disagree and see the inherent unfairness of lowering principle, doing so should actually benefit the market somewhat. Neither the banks nor the market can withstand the potential flood of foreclosures that awaits.

Esko. The present housing crunch is going to require some very effective management on the part of government and cooperation's on the part of the Lenders to see success. The market can only obsorb so many homes at any one time. I agree with John's comment about the potential overall market benefit by applying principal reductions.

OCT

This MUST happen in order for our market to get rid of the "strategic defaults" - which no matter how this is sliced and diced, this is the MAJORITY of types of foreclosures here!

Gary,

Thanks for the example that principal reduction can work.

George,

You have a good point there on the fairness side of it.

John,

In the big picture it appears to be a beneficial solution.

Steve,

Banks in many cases are cutting their losses by doing this.

Renee,

In the hard-hit areas like Las Vegas strategic defaults are a serious issue.

It's finally about time this is the only way to contain the foreclosures.

OCT

Principal reductions don't seem fair when you do have homeowners that are making the monthly payments on time every month. However, it also isn't fair for homeowners to continue to drown in debt and make monthly payments on homes that have decreased so much in value. I think principal reductions will go a long way towards helping to stabilize the housing market.

Esko--I agree with Renee. I have done several of these "short-refis" myself with unbelieveable benefits for my clients. On the surface it may seem unfair (life isn't fair by the way), but it is COMPLETELY needed in Vegas. 81% of homeowners are upside-down--a stunning number by any account. Most people don't realize that short-refis stabilize values in neighborhoods as opposed to short sales (sorry Realtors). Reductions in principal are not taken into consideration by appraisers. Let's hope more lenders start seeing the benefits of this not only for them but for the housing markets.

No one ever promised that life was going to be fair or even that it should be fair. This is good for the economy and for housing. If we can keep people in their homes there be less inventory to be absorbed. I"ve argued from day one that the best way to solve the housing crisis was to offer tax incentives to lenders for effectively modifying mortgages. It would have created a win/win all the way around! Better late than never.

i'm in southwest florida and i'm not seeing or hearing about that type of modification here. there was a very big swing in values and i'm not sure the lenders are going to make that much of an adjustment.

Our market does not seem to be getting those types of modifications unless it is entirley unkown to me. My neighbor was trying for this relief, thought it would be done in August, but it did not get done.

I have been doing short sales, and helping give some direction to those trying to keep their homes with a loan modification for 3 plus years. Everyone wants a principle reduction. I have yet to see anyone get approved for such a modification.

Why is "OK" to short sale a family's home, that has gone from 400k value to 250k to a new buyer when the current owner could easily afford the payment on that new value. Now that seller is- homeless, has poor credit, and been through major trauma. That does not make sense.

For all the home owners that pay their bills on time who will cry foul. They will benefit from stabilized property values, as fewer homes go to foreclosure, and short sale.

The government should pass cram down legislation right away. It will help equalize the market. by keeping homes from foreclosure. A principle reduction will also be a major incentive for the home owner to keep the place. It's hard to get motivated to pay for a home that is 40% or more "underwater". This is pretty typical for a buyer at the boom since our prices in Manatee county are about HALF of the their peak in 2005.

It seems a great way to get rid of stategic defaults. And the right thing to do for struggling families.

Interesting discussion and as usual ther won't ever be one solution that everyone likes. I do though appreciate that getting more people on stable ground will also help to stabilize the market.

Kendall: I would RATHER have my neighbor short refi than short sale, deed in lieu or get foreclosed on! No need to apologize to this Realtor.

I have not seen this locally yet, but I am sure it will come. However if it becomes common knowledge would we not see more homeowners deliberately trying to get a principal reduction by defaulting?

Esko: Thanks for the update. I haven't heard about too many up here although I get the occasional request to help. I think loan mods. are o.k., especially if the homeowners are under water. I hate to see anyone lose their home and know the banks don't really want it either. Take care.

Kendall It is far better than short sale or foreclosure Karen

if anything it will be interesting to see how things play out in the new year which is just around the corner

The reason that banks are reluctant to lower the principal in a loan modification is that the majority of loan modifications do not work. Even after lowering the rate and even the principal, a majority of borrowers go right back to defaulting. It is a tough situation.

In principle, there is nothing unfair about a loan modification. As has been stated in comments above, it benefits all home owners as home values stabilize. Ben Bernacke, the Fed chairman gave the perfect analogy. Suppose your next door neighbor is irresponsible. He has faulty wiring in his house, leaves flammable liquids around and smokes in bed. If his house catches fire do you say "Do not call the fire department! I do not want my tax dollars going to help such an irresponsible person put out the fire." Of course not. His fire may directly effect you. Same thing here. A foreclosure is like a cancer that may effect even healthy cells in the neighborhood.

Good to hear the banks are working on the problem

Paul--The main reason the banks don't want to lower principal has very little to do with the failure of modifications and more to do with the accounting laws according to several of my banking acquaintances here in Vegas. Thye tell me the difficulty lies in the fact that a short-refi (or principal reduction) loss can only be written off over one year as opposed to a short-sale or foreclosure which can be written off over 5 years. Not sure of the validity of this myself, but that's the "reason" they are denying many of our attempts. They say it's simply more financially beneficial for them to foreclose or short-sale.

Renee and Karen--You're right, as neighbors we should all want the short-refis to stabilize our values. A rising tide lifts all boats, and in Vegas, ours are sinking!

Esko... this is all starting to be talked again and I am not seeing any consistency.You made this statement.... "It doesn't have to be all the way down to current market. As long as it is large enough to keep the homeowner in his residence with an affordable mortgage payment, both sides are likely to end up winners."

I guess this is what ticks me off about the whole thing. As George mentioned, is this fair to those that are under water, who pay their bills? And here is my main issue and question to your statement. Keep homeowners in their home with an affordable payment. Wait, didn't they have to get qualified prior? Didn't they see their payment before closing? Didn't they review their finances? Each time I qualify a borrower, one of the first questions I ever ask is, "how much of a mortgage payment do you feel comfortable with, a range... and this payment includes your taxes and homeowners insurance."

Overall, I understand what you are saying and why some banks would want to modify. A short refinance in many cases would be cheaper and better for all. And I know some banks are looking at their finances, before approving the modification, to ensure financial distress. But a blind statement stating that banks should lower the payments to make it more affordable because they are under water? Being under water doesn't keep you from making your mortgage payments. .. well, it shouldn't. Only if you have a loss of income or some other financial emergency. So what are we saying to the general public with all of this then? I wrote about this a few days ago, because some politician thinks that we should raise the down payment by 1.5%, thinking that this could help some. 5% down payments on FHA loans now? And because you have a few that commented stating that there should be more skin in the game. In reality, what are the main reasons? Loss of income? Loss of job? thanks for this post.

Jeff Belonger

This is an amazing story and well worth the feature. I have been telling short sale sellers who have asked about loan modifications that anyone promising to reduce your principal is someone to be wary of. I would love to see this enter the marketplace. I know many people who could use the assistance.

Great Blog congrates on the feature...curious if the bank reduces the principal can the client still sell and make money...

I'm not sure that I see the logic in principal reduction, unless it is across the board to all homes. Are banks rewarding borrowers who cannot or do not make their payments? Where is the reward for families who have remained faithful, doing whatever it takes to remain current? It's dangerous ground we are entering.

Marcelo,

This will bring a new dimension into solving the problem.

Danielle,

There sure are pros and cons to it.

Kendall,

This seems to be one usable step toward settling not only Vegas marketplace, but others, too.

Kate,

Principal reduction has a good chance of making a nice difference for the real estate market.

Jay,

It's conceivable that lenders employ this based on market projections.

Dave,

It's still in its infancy, but gaining ground.

Joe,

You make a good point about home values stabilizing, thus helping those who continue making their payments.

Tina,

Broad discussion is a great stimulus for us industry pros.

Renee,

That's a considerate way of thinking.

Corinne,

It's slowly gathering steam, probably more in the hard-hit areas first.

Paul,

Likely reason being your market didn't get mauled as bad as some others did.

Karen,

Thanks for stopping by. You're right.

Gene,

Let's if the pace picks up going into 2010.

Paul,

That's a solid analogy from Bernanke. Looks like he's good for something. jk

David,

This is a move in the right direction.

Kendall,

Accounting law is an area that many are unaware of in this situation. Good info.

Jeff,

For the sake of stabilizing the marketplace the banks are obviously seeing this as a helpful process. You make some valid points, though.

Christianne,

This slowly gaining acceptance among banks, predictably more so in markets where values remain weak.

Tim,

It's doubtful the principal cutback would go so far as to allow a profitable sale soon thereafter.

JB,

If a bank decides to do this it's helping itself first, which usually means it is cutting its losses.

Thanks for the heads up, Esko. I am a supporter of the idea of principle reduction. Some of the short sales I have been doing would be people still in their homes with less negative economic effect.

We are seeing some lenders that will short refi. HSBC is one that is really easy to work with. Also, Select Portfolio services which accepted 300k reduced ppayoff for a refi. HSBC accepted 100k and 50k reduced payoffs and both loans closed last month. These were borrowers that were not in delinquent status on their loans. They qualified for FHA loans with low interest rates and the lenders were able to avoid the inevitable...A drawn out delinquency to foreclosure scenario that was about ready to take place because of arm loan resets.

Hopefully banks are getting smarter. It's only taken them two years to learn a little back

There is no real democracy and not even the least bit of fairness in the present system. Does it matter if the bank lures you into more and more credit at good times and crushes you when something happens at bad time or the government does the same thing? Basically credit is very unhealthy to a lot of people in our country especially without education about its nature. So whoever was giving away money that did not belong to them to begin with ( and the money does not belong to the bank - it is your money they use) without any checking if you can repay the loan or not, should be punished with the same thing. Hence it's not unfair to do a loan mod, it is necessary to teach the banks a valuable lesson. They can be punished too!

I think we're going to keep running into a fairness question with this, and then there will be the question of strategic default. Will more people do it if principal reduction is the response?

At the same time, perhaps it will decreas the number of foreclosures.

OCT

Joe,

The less negative economic effect is a key component in principal cutbacks.

John,

Some lenders are more progressive on this than others. Good for affected homeowners.

Russ,

It looks like they were hoping for a market recovery so they don't need to do this.

Sal,

Good points. They make the reader think.

Christine,

Lot of things need to be considered to fix this mess as equitably as possible.

OCT

Congrats on the feature, Esko. I would say that there is no easy or right answer at this point n the world of Real Estate...and reading the varying opinions is enlightening. Thank you for the dialogue. :-)

Sarah,

Thanx. This discussion was lively and broad. That's the purpose.

DEC

This is really a very intersting article. I can't believe some people get all the luck while others have to struggle so much espeically the people who have never been late in their mortgage!

Marylou,

Thanks for coming by to comment.

DEC

My question is, what about people who have already modified? Are they tied down to it? What if they agreed to a loan mod even if they are upside down? Don't they deserve a principal reduction too? How does that work?

Marylou,

Every bank has their own rules and they may be willing to renegotiate. Or do a principal cutback.

JAN

I feel the principal reduction is almost ridiculous. It almost incents borrowers paying on time to strategically default! Of course, the counter to this is when all of the borrowers who don't get mods default and basically tank the entire neighborhood/city.

It's a no win situation.

Brian,

There are no easy answers to the problem. This is one painful solution, though.

FEB

Esko, how many principal reductions are actually going through? 1 out of 10? 2 out of 10? New companies are popping up with promises like loan mods when they started. I am interested to hear the ACTUAL success rate.

FEB

Bonnie,

I haven't seen any actual numbers, but industry sources talk about it more and more, so it's gaining traction.

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Esko Kiuru - Las Vegas NV Mortgage Consultant

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