Mortgage-Debt Forgiveness Preventing Foreclosures
By Les Christie 
CNNMoney 
June 22, 2012
http://money.cnn.com/2012/06/22/real_estate/mortgage-debt/index.htm

NEW YORK (CNNMoney) -- Reducing the amount struggling
homeowners owe on their mortgages is proving to be a
more effective way to prevent foreclosures than other
methods, such as reducing interest rates or postponing
payments, a new report finds.

In a report presented this week, Amherst Securities
Group said that when principal reductions brought
mortgages near the home's market value, borrowers were
substantially less likely to fall behind on payments
again and lose their homes.

Only 12% of borrowers who received principal reductions
re-defaulted in 2011, Amherst found. That's compared
with 23% of borrowers who received mortgage
modifications with interest rate reductions (but no
principal reduction) and 30% who received forbearance,
which postpones their debt repayment.

"[Modifications] with principal forgiveness are apt to
be most effective, as the borrower no longer owes the
money -- so he is no longer hopelessly underwater," said
Laurie Goodman, Amherst's housing market analyst and one
of the authors of the report.

The success these principal reductions have had in
turning delinquent borrowers back into paying clients
has led many lenders to step up debt forgiveness on the
loans in their own portfolios.

So far this year, principal reductions have accounted
for 40% of the modifications done by the banks, up
dramatically from 25% in 2011 and 11% in 2010, according
to Amherst.

The mortgage servicers cannot forgive debt on loans that
are owned or backed by one of the two government-
controlled mortgage giants, Fannie Mae (FNMA, Fortune
500) and Freddie Mac (FRE), however, and they are
limited in what they can forgive on loans owned by
investors.

That means, of the vast majority of loans -- 6 million
since April 2009, according to the Treasury Department
-- only a fraction have received debt forgiveness. That
may be changing, though.

The Federal Housing Finance Agency, which controls the
majority of outstanding mortgages through its oversight
of Fannie and Freddie, has thus far prohibited the
mortgage giants from including debt forgiveness as part
of their mortgage modifications.

Last month, however, Fannie and Freddie announced they
would participate in two programs in California and
Nevada that will use part of a $7.6 billion Hardest Hit
Fund to pay down loans the companies own or back.

However, the move will not cost Fannie and Freddie
anything and is a far cry from the principal reduction
that private mortgage servicers are extending to
borrowers.

"My guess is that eventually, [Fannie and Freddie will]
go down that path, but there's still a lot of reticence
there," said Mark Zandi, the chief economist for Moody's
Analytics. "People have problems with principal
reduction. They think it's unfair."

Even if Fannie and Freddie remain on the sidelines,
Amherst said it expects to see a continued increase in
principal reductions.

One reason is the $25 billion settlement reached in
March between the five big mortgage banks and the state
attorneys general. As part of the settlement, the banks
must use $13 billion to reduce principal on mortgages
held by underwater borrowers.

Even more principal reductions will also result from the
tripling of incentives paid to mortgage investors who
participate in the Principal Reduction Alternative
(PRA), part of the Home Affordable Modification Program.
For each dollar investors -- the pension funds,
municipalities and other buyers of mortgage-backed
securities -- allow to be written off, they can get back
as much as 63 cents from Treasury.

By April, 2012, the number of modifications started
under Principal Reduction Alternative had jumped to
about 83,000 from 67,000 in January.

The potential for building equity in the home, which
principal reduction revives, is a major carrot for
homeowners, especially if they're underwater on their
home, said Sam Khater, a senior economist for CoreLogic.

The typical amount of debt forgiven in a principal-
reduction modification is about $60,000, according to
the Treasury Department. Meanwhile, the average amount
that borrowers are underwater is about $70,000, said Sam
Khater, senior economist for CoreLogic. As a result,
borrowers can be very close to even once their
modifications are done, he said.

"In two or three years of regular payments -- and a
little home price appreciation -- the borrower can be
right-side up again," said Khater.

___________________________________________

Portside aims to provide material of interest to people
on the left that will help them to interpret the world
and to change it.

Submit via email: [log in to unmask]

Submit via the Web: http://portside.org/submittous3

Frequently asked questions: http://portside.org/faq

Sub/Unsub: http://portside.org/subscribe-and-unsubscribe

Search Portside archives: http://portside.org/archive

Contribute to Portside: https://portside.org/donate