Reblogger Fernando Herboso - Broker for Maxus Realty Group
Real Estate Broker/Owner with Maxus Realty Group - Broker 301-246-0001 Broker - Realtor - CEO

Often times I get this question a lot trough my website

"Why can the Lenders just reduce the principal so troubled homeowners can stay in their houses. . ."

Many reasons why this is not a popular choice for Lender. .

Mostly because if they agree to one, then their next door neighbors would want the same thing..and their next door neighbors and their next door neighbors and so on. . .until the banking industry collapses


Original content by Richard Zaretsky

In a briefing by Credit Suisse this week, the financial giant’s opinion was that reducing principal balances of underwater mortgages is a risky idea that has not been shown to keep underwater borrowers from later defaults.  In my practice as a Florida real estate lawyer, that opinion flies in the face of borrower sentiment.  The guiding force in the Credit Suisse statement seems to be the “moral hazard” argument, coupled with statistics about the failure of principal reductions helping homeowners.

As reported by Bloomberg News, Dale Westhoff on behalf of Credit Suisse said that of the 11 million “underwater” homeowners, about 6.5 million have never missed a payment and 2 million more are making on-time payments after delinquency.  He said that widespread principal reductions may drive defaults much, much higher as borrowers seek the aid.  But he also said that such wholesale principal reductions have never been done before and the associated risk is unknown.  Furthering that argument, he said that if principal reductions are offered, it may create the concept that the lenders are guaranteeing the value of homes.

Others don’t share the same view.  I for one find that 50% of those that seek my assistance have decided that without a meaningful principal reduction, they are merely overpaying rent and having a debt obligation as well.  This sentiment was predicted as far back as 2001. [See my article A HOME WITHOUT EQUITY IS JUST A RENTAL WITH DEBT]. 

While Fannie Mae and Freddie Mac maintain a no principal reduction policy, New York Federal Reserve Bank President William Dudley said this month that without a significant turnaround in home prices and employment, a substantial portion of deeply underwater home loans (as in Florida) will ultimately default absent a realignment of principal to market value.  This concurs with the findings I make in my office everyday by speaking with troubled borrowers.

Will the argument that principal reductions will bring out a flood of applications for similar aid hold true – I think the estimates of that flood are probably understated! - At least here in Florida.

The problem has been quantified by specialists as needing to avoid 8 to 10 million more distressed property sales through the application of principal reductions.  Although some programs for “short refinancing” are in effect, with 125% caps that is not enough in the hardest hit states – where the market value drops are far greater and the bulk of the problem loans exist.

From the macro viewpoint, short sale guru (as in billion dollar bets that the mortgage bonds would fail) Greg Lippmann wonders what the big deal is – since investors write down their portfolios anyway and have been doing business like this for years.

 It seems to me that writing down the loan at the borrower level will have the added benefit of lowering losses on the loan underlying the mortgage bonds, therefore stabilizing that market.  Without the help to the first tier borrower – the homeowner – the homeowners’ later default simply makes the foundation upon which the bonds are created subject to disintegration.  If we don’t see principal reductions then this is going to be a very slow recovery.  If we do see principal reductions we are liable to experience “non-qualified” borrower revolt and a new era of lending and doing business a very different way.

In the meantime, principal reductions remain the elusive holy grail of those seeking loan modification relief.


Copyright 2012 Richard P. Zaretsky, Esq.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader. Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Website

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Clint Mckie
Desert Sun Home, commercial Inspections - Carlsbad, NM
Desert Sun Home, Comm. Inspection 1-575-706-5586

Hello Fernando.

I can see why the lending institutions would nt want to reduce the amount owed in under water home loans.

Like me I would not want to reduce the amount owed to me. I would want every dime that is owed to me. On the other hand, if you are going to have to "REPO", then that's another story all together.

Best, Clint Mckie 

Jan 28, 2012 12:12 AM #1
Kathy Toth
Ann Arbor Market Center Keller Williams - Ann Arbor, MI
Ann Arbor Real Estate Experts - Kathy Toth Team

until the banking industry collapses....haha   until it collapses?

Jan 28, 2012 12:18 AM #2
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Fernando Herboso - Broker for Maxus Realty Group

301-246-0001 Serving Maryland, DC and Northern VA
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