Apr282016
Principal reduction is the worst remedy for the underwater borrower crisis
Principal reduction rewards those who deserve help the least at a very high cost paid by those who obtain no benefit at all.
Principal reduction transfers wealth from one party to another. For every underwater borrower who ostensibly needs principal reduction, there’s an investor who holds that loan as an asset; for the borrower to gain, the investor must lose. While few may decry the confiscation of wealth from the one-percenters, most of these loans are held by pension funds for ordinary Americans, and most of those are backed by government loan guarantees, so any widespread principal reduction program would be paid for by everyone, not merely a demonized select few.
Further, costly principal reductions fail to benefit many people who might be worthy of assistance. In fact, most of the benefit would accrue to irresponsible spendthrifts rather than prudent, hard-working Americans. To understand why that is, it’s important to make some important distinctions about the homeowners in need of principal reduction.
First, underwater borrowers own more debt than real estate. In reality, they don’t own their homes at all. Yes, their names may be on title, but if they don’t have any equity, so they don’t own anything. The various proposals for principal reduction only apply to loan owners. No homeowner — a title holder with equity — receives a penny of principal reduction. In fact, true homeowners — those on title with no loan encumbrance — couldn’t receive principal reduction because they don’t have a loan. Principal reductions only benefit title holders with no equity — a benefit paid for by renters (who by definition have no equity) and home owners who really do have equity.
Second, homeowners eligible for principal reduction only need it because they borrowed excessively. If they borrowed responsibly, used fixed-rate financing, and they can afford the payments, then they wouldn’t need principal reduction. Why would they? No lender reduced principal when prices were going up, so why should lenders reduce principal now that prices are lower? Is principal reduction required because unemployed and underwater borrowers need temporary assistance? No, those people obtained (or were offered) loan modifications to weather the economic slowdown, so they don’t need principal reduction.
By and large, the people who supposedly “need” principal reduction over-borrowed, many through rampant HELOC abuse or toxic financing. Most people over-borrowed by choice because they wanted to obtain property they viewed (incorrectly) as a stable investment — property they couldn’t truly afford. After all, if they were only concerned about providing shelter, they would have recognized the savings from renting and chosen not to buy during the bubble. It’s inappropriate for the bureaucrats to confiscate our tax money to bail out real estate speculators and investors.
The only way to fix the housing crisis
Elyse Cherry, CEO of Boston Community Capital, Friday, 22 Apr 2016
… It would be welcome news if the Federal Housing Finance Agency (FHFA), which governs Fannie and Freddie, takes this path — cutting the amount a family owes on its mortgage so it no longer reflects an inflated, pre-crash value. But doing so on the very small scale that’s being proposed won’t be enough. If we want to finally recover from the 2008 housing crash — freeing up debt-laden families, helping them stay in their homes and stimulating the economy — the FHFA should enact this initiative as a first step and then expand it.
This is the camel’s nose poking under the tent. Expanding a principal reduction program would be extremely costly, and the benefit would only accrue to a select group of undesirable borrowers, fostering moral hazard.
We know from the government’s own research that large-scale principal reduction works. Three years ago, the nonpartisan Congressional Budget Office (CBO) — the research arm of Congress — found that, had Fannie and Freddie embraced principal reduction after the 2008 crash, they would have foreclosed upon fewer families, saved taxpayer dollars and boosted economic growth. …
Complete and utter bullshit. Obviously, nobody outside the Congressional Budget Office believes the report.
Fannie and Freddie, and the financial sector generally, have so far failed to follow these findings.
That’s correct. The GSEs own analysis reveals the more obvious truth: if the GSEs forgive principal, they will need to forgive every underwater borrower in their entire portfolio, and the losses would be staggering. If the GSEs really believed principal reduction would lose them less money, they would have done so.
Yet principal reduction remains the only path forward from this crisis — for homeowners, the economy, and, in the long run, for banks and other lenders in the financial system.
Actually, no. Lenders can can-kick bad loans, deny short sales, and trap underwater borrowers in their homes until prices come back.
If Fannie and Freddie — which own or guarantee more than half of U.S. residential mortgages — lead on embracing it, other lenders should follow.
Yeah, right. Lenders will abandon their successful can-kicking efforts and embrace massive write downs that bankrupt them as institutions? No way.
In the meantime, let’s be clear: The foreclosure crisis is not over.
(See: Mortgage and foreclosure crisis 2.0)
If we now know what would work and hasten a full recovery, we also know what hasn’t. As part of the spending package it passed in December, Congress decided with little notice to quietly kill off the Home Affordable Mortgage Program (HAMP). As the only option for many struggling homeowners, it proved ineffective overall. HAMP lowered monthly payments for families, but not by much, and more importantly, it kept intact outsized, pre-crash mortgages that left families buried in debt. Fewer than one million families received assistance from HAMP, and nearly one in three that did use it ended up defaulting again when the loan modifications they received did not go far enough. …
Everyone know HAMP was going to fail from the start, but it quieted the calls from advocates for principal reduction, and it made politicials look like they were doing something about the issue when they really weren’t. (See: Upcoming mortgage resets and recasts prompt more loan modification can-kicking)
FHFA’s proposal to limit the initiative based on mortgage size, among other restrictions, needs to be rethought: It is precisely the bubble-driven, overinflated mortgages that are driving this problem and burying families in debt.
I agree with her that excessive debt is the problem.
When the Great Housing Bubble deflated, everyone incorrectly identified the problem as foreclosure. The real problem was not foreclosure: the real problem is that borrowers carry excessive debts due to the huge loans lenders underwrote and borrowers gladly accepted. Foreclosure is not the problem, it is the cure. Foreclosure purges the excessive debts, and it provides consequences to both lender and borrower to prevent a recurrence of the mania.
Principal reductions are the worst possible solution to the problem of excess debt because principal reductions merely gives foolish borrowers a pass. If the borrowers go through foreclosure, they have consequences that minimize moral hazard:
- Borrowers will be forced to rent, at least for a time.
- Borrowers will have reduced access to consumer credit as the foreclosure lowers their FICO score.
- Borrowers will have to save and be prudent in order to meet the standards of home ownership and get another loan.
If the GSEs reduce mortgage principal, the borrowers avoid the consequences, creating moral hazard. The borrowers who borrowed most foolishly gain the most by principal reduction — and the people paying the price are (1) prudent borrowers and (2) those who didn’t borrow at all. The tenet of moral hazard postulates that everyone will engage in widespread foolish behavior because the consequences for doing so were less than the reward. Who passes on free money? Obviously, nobody does.
We must learn from the mistakes of the past and chart a bold new course. All underwater homeowners, regardless of mortgage size, should be able to access principal reduction, to bring their mortgages in line with the fair market value of their homes. …
I can’t think of a worse course of action.
[listing mls=”OC16086995″]
Yesterday’s post was picked up by a few highly-trafficked websites. The post was viewed by over 7,250 people, a new one-day record. Apparently, the shortage in California housing is on a lot of people’s minds.
Fruit of your labor. Congrats!
Nice!
Awesome, great job! Cream of the crop rises to the top.
+1000
America Is Finally Putting Home Foreclosure Crisis Behind It
Can-kicking creates the illusion of stability and improvement
It’s taken nine years, but the number of U.S. homes in foreclosure has fallen to a level not seen since before the 2008 housing crisis.
More troubled borrowers are making their way through the foreclosure process, which can take more than five years on average in some states. The number of properties in active foreclosure declined by 24,000 to 631,000 in March, according to Black Knight Financial Services. That’s the lowest since October 2007. Neighborhoods across the country were in the coming years flooded with more than 2 million notices from banks.
The wave of foreclosures crested in 2010 when banks seized a record 1.2 million properties and served even more with notices of default, auction or repossession. People suffering from the worst economic crisis since the Great Depression just “mailed their keys to the banks and just said ‘take it’,” said Ben Graboske, a chief technology officer at Black Knight.
The huge inventory of foreclosures has taken years for lenders and borrowers to work through. “We are finally getting back to a very clean slate,” Graboske said.
[No, weren’t not.]
With incomes slowly rising and unemployment claims the lowest since the 1970s, more borrowers are staying current with their payments. Delinquencies on home loans across the country fell to 4.08 percent in March, the lowest since March 2007, according to Black Knight.
The most recent data suggests that the country has put its crisis-era foreclosures behind it, said Christopher Sullivan, chief investment officer of United Nations Federal Credit Union. Housing markets nationwide have been marked by an uneven recovery, but the pace of improvement has generally been positive, said Sullivan. In some cases home prices have appreciated so much that further increases may be “unwelcomed” as higher home values put off potential first-time home-shoppers, he said.
The reduction in late payments and foreclosures is allowing some of the
country’s biggest banks to further cut resources at units that specialize in
handling delinquent borrowers.
Wells Fargo & Co., the largest U.S. mortgage lender, announced the elimination of about 250 positions last week as lenders scale back groups that deal with delinquencies, according to a person with knowledge of the matter, who asked not to be identified citing lack of authorization to speak publicly. The Charlotte Observer reported the job cuts last week.
Though the data suggests that the recovery is well under way, the country’s housing markets “still have a ways to go,” said Sam Khater, deputy chief economist at real estate data provider CoreLogic. While most foreclosure or distress metrics are the lowest in nine years, they are still above the late 1990s when the market was “last normal,” he said.
As expected, Fed holds off interest-rate hike
Just as many predicted, the Federal Open Market Committee, the group that sets the benchmark interest rate for bank lending, elected this week to hold steady and not increase federal funds rate.
The current rate is set at between 0.25% and 0.5%, and will remain so, until at least the FOMC’s next meeting in June.
According to a statement from the FOMC, labor market conditions have “improved further” since the FOMC’s last meeting, but “growth in economic activity appears to have slowed.”
The good news for housing, at least in the eyes of the FOMC members, is that the housing sector “has improved further” since the beginning of the year.
“A range of recent indicators, including strong job gains, points to additional strengthening of the labor market,” the FOMC said in its official statement.
“Inflation has continued to run below the Committee’s 2% longer-run objective, partly reflecting earlier declines in energy prices and falling prices of non-energy imports,” the FOMC continued. “Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.”
One interesting absence from the FOMC’s latest statement is a mention of “global risks” as a concern for the strength of the U.S. economy.
In its last statement in March, the FOMC said “However, global economic and financial developments continue to pose risks,” but there is no mention of the global economy in the latest FOMC statement.
“In light of the current shortfall of inflation from 2%, the Committee will carefully monitor actual and expected progress toward its inflation goal,” the FOMC stated.
“The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run,” the FOMC continued. “However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”
Comparing the US Federal Reserve’s views on the US and global economies, jobs
A comparison of the Federal Reserve’s statements from its two-day meeting that ended Wednesday and its meeting March 15-16:
ECONOMY:
Now: The Fed acknowledges growth has weakened, but points to stronger hiring: “Labor market conditions have improved further even as growth in economic activity appears to have slowed.”
Then: “Economic activity has been expanding at a moderate pace despite the global economic and financial developments of recent months.”
GLOBAL RISKS:
April: Fed policymakers have downgraded the threat posed from overseas, noting that they will simply monitor the threats: The Fed “continues to closely monitor inflation indicators and global economic and financial developments.”
March: “However, global economic and financial developments continue to pose risks.”
CONSUMER SPENDING:
April: The Fed notes that Americans are spending cautiously, but hints that may change soon: “Growth in household spending has moderated, although households’ real income has risen at a solid rate and consumer sentiment remains high.”
March: “Household spending has been increasing at a moderate rate, and the housing sector has improved further.”
My crystal ball shows signs of blinking in September, going solid in December. I don’t think the Fed is going to raise in September, since it’s too close to an election, unless the data strongly supports it. I think the data will be strong by that point (GDP, inflation, jobs, wages) just not strong enough to provide political cover.
The economic slowdown the first six months of the year has put off the next increase by 6 months, in my opinion. So June is starting to look a lot less likely. I think there needs to be a couple strong quarters before the Fed takes that next step.
Plus, I think erring on the side of inflation is the better choice. We still never really pulled out of the last recession. Plunging us into a new one through by raising rates is the wrong policy decision. I think there is little or no chance of inflation getting out of control. Nor do I see an increase in inflation expectation being very likely.
Mortgage applications decline amidst spring home-buying season
It was a tough week for mortgage applications, as the latest report from the Mortgage Bankers Associations reveals that the usual highs of the spring home-buying season are not there.
Mortgage applications decreased 4.1% from one week earlier for the week ending April 22. While the last mortgage rate report showed a humdrum week for mortgage applications, it was coming off of the previous week’s high.
The Refinance Index fell 5% from the previous week, as the seasonally adjusted Purchase Index decreased 2% from one week earlier.
Rates ticked up about 1/8th percent, so the drop in refis makes sense.
I thought this year would see robust sales with the improvements in the job market and low mortgage rates. I am somewhat surprised by the weakness in applications and pendings going into the prime selling season, particularly in the West.
It must be El Niño. 🙂
In fact if we had had strong torrential rains, that would have been the perfect excuse for realtors to use.
The weather forecasters in the first quarter erroneously predicted a massive El Nino. This had a profound effect on homebuyers. Because the pent-up demand is so great, the savvy homebuyers did not want to start looking for homes only to by stuck at home during the rains.
You could write for Lawrence Yun…
Most of the jobs being created are part time and/or service/retail sector low paying wages type of jobs. Exactly the type that can’t afford $500k+ home prices.
Are mortgage applications down because more buyers are paying cash?
In Some Markets, Home Prices Rise 5 Times Faster Than Inflation
It should come as no surprise that home prices continue to soar as the economy improves and more people enter what increasingly seems like an elbow-throwing, cash-hurling scuffle to secure the few homes available for sale.
But one region is seeing particularly dramatic gains. In the Pacific Northwest, homes are appreciating several times faster than inflation.
Nationwide, home prices jumped 5.3% in February compared with a year ago, according to the most recent data from the S&P/Case-Shiller Home Price Indices. But they remained relatively flat from January. The report looked only at existing, detached, single-family homes and not newly constructed residences.
“In a number of markets, especially in the Pacific Northwest, prices are rising quite rapidly—four to five times faster than inflation,” says David Blitzer, managing director of the index committee. “They have not much [housing] supply and not much new construction.”
The problem? Folks aren’t putting their homes on the market to trade up to nicer, larger ones because they don’t think they can find—or afford—a new abode, he says. That means there are fewer properties on the market for first-time buyers without deep pockets. And there aren’t enough newly constructed dwellings to make up for it.
This realtor article is intended to create false urgency. Nowhere in the article does anyone express concern about the sustainability of these prices increases or the fact that it may signal an inflating housing bubble.
There was a feature on NPR this morning talking about how Boomers have not downsized in retirement as everybody expected they would. Of course, being the liberal station that NPR is they blamed it on Prop 13, but I think it has more to do with the personal characteristics of the Boomer generation. A lot of their identity is wrapped up in the homes they own. It’s a physical manifestation of the success they’ve achieved in life, and they want others to see it. There is great resistance to giving that up.
No-one downsizes unless they’re forced to. The economy has been much kinder to them than to Millennials, not many people would have predicted that 10 years ago.
Yes. I think the whole idea of mass downsizing was a silly expectation. Some seniors will, but by and large, most people will stay in their family homes until they are forced into a care facility or they die.
That’s why I don’t listen to NPR. Prop 13 was modified by Prop 60 back in 1986 to allow someone over 55 to transfer their base year value if they buy a house of equal or lesser value. Assuming properties are in the same condition, downsizing means lower price.
http://ca-contracostacounty.civicplus.com/DocumentCenter/Home/View/817
Boomers don’t have to sell, at least the ones that are even remotely conservative. Boomers that have paid off their houses, have two social security incomes, two pensions, and put away just 10% of their earnings, don’t have money issues.
I think we will see boomers moving in another 10-15 years as mobility issues change their housing needs. This may mean more home sales, or rentals, or their grown children may occupy the house and pay for a downsized house.
Even when boomers eventually pass on, they can transfer their property without the property taxes rising.
Three Ways to Save your Heirs Thousands in Property Taxes
https://www.hg.org/article.asp?id=6493
“In California, Proposition 13 has revolutionized the property tax system. Parents can pass on a house to their children without any reassessment of property tax. The effects can be significant. However, one might lose the exception from reassessment unless the transaction is structured perfectly.”
Sales cratering in Western US
Broken up regionally, Yun said, “Demand is starting to weaken in some areas, particularly in the West, where the median home price has risen an astonishing 38% in the past three years.”
“As a result, pending sales in the region have now declined in four of the last five months and are lower than one year ago for the third month in a row. Closed sales in the region in March were also below last year’s pace,” he added.
“So far this year, much of the softness in national new home sales numbers has been driven by weakness in the West region. In both January and March, new home sales in the West fell more than 20% month-over-month. Some, but not all, of this slack has been picked up in other areas of the country: Over the year, new home sales are down 20.7% in the West, but up 15.4% in the South,” Zillow Chief Economist Svenja Gudell said about the new home sales report.
“The West region is home to some of the nation’s priciest and fastest-growing housing markets, and continued weakness could indicate some fatigue among homebuyers who need a breather from breakneck appreciation,” she continued.
I can’t speak for the rest of the West, but my area is showing the strongest pending sales in the four years I’ve been tracking it. These are the numbers from the end of April:
Active Pending Sold A/P
2016 118 72 70 1.6
2015 110 48 70 2.3
2014 100 44 69 2.3
2013 73 48 80 1.5
Pending sales are 54% higher than the prior 3yr average. I’ve performed the exact same search every week on Redfin and archived the numbers, so I have confidence in the data. You can see that in 2013 there was much less inventory for the same number of pending sales. Active inventory rose in 2014-15, but pendings didn’t. Now the active to pending ratio is back where it was in 2013 – indicating a lack of inventory.
The desirable areas are still doing well. I think it’s mostly the less desirable areas where sales are tanking. Apparently, people are not willing to substitute downward in quality just to own something like in years past.
@Russ – How does someone go about tracking active/pend/sold in our areas of interest? I’m in San Diego and looking to buy next year and I just want to track certain zips as well and see when it’s time to pull the trigger! 😀
Home-Price Surge Stymies First-Time Buyers
With mortgage rates at historic lows, unemployment at its lowest in eight years and housing inventories shriveling, particularly on the lower end of the spectrum, U.S. housing markets are becoming less affordable compared with historical norms. That puts the most pressure on first-time home buyers, who accounted for less than a third of home purchases last year, the lowest level in nearly three decades, according to the National Association of Realtors.
Three-quarters of real-estate markets in U.S. counties larger than 100,000 people are less affordable now than a year ago, according to a recent analysis from data company RealtyTrac. Home prices have outpaced wage growth in 94% of those counties since home prices hit bottom in each of the locations, the analysis found.
Of 132 markets tracked by John Burns Real Estate Consulting of Irvine, Calif., 27 are less affordable than historical averages, up from 16 last year.
“Inventory is very restricted, which is creating bidding wars and pushing up prices,” said Daren Blomquist, a senior vice president at RealtyTrac. “That makes it a very tough environment for many buyers.”
Not all major markets are facing extreme supply pressures. In Las Vegas, one of the regions most severely burned in the downturn, inventory is at a very stable six months’ supply, according to data from John Burns Real Estate Consulting.
“This is the classic financial cycle,” said Klif Andrews, Las Vegas division president for builder Pardee Homes. Markets such as Las Vegas “ran the hardest and the highest, and they over-corrected. Now they’re trying to get back to a normal level.”
Appraisal volume shows weakened spring housing market
It doesn’t look like peak home-buying season judging by the latest appraisal volume numbers from a la mode, an appraisal forms software company that tracks appraisal volume throughout the country and provides its findings exclusively to HousingWire.
For week of April 17, the National Appraisal Volume Index grew 2.2%, down from a 3.6% rate last week.
As a result, the four-week average rose to a modest 1.7% from 0.5%, finally offsetting the significant drop at the end of March.
“While mortgage rates are very low, it appears that the tight credit, low inventory and high home prices have stifled any momentum this spring,” said Kevin Golden, director of analytics with a la mode.
“There doesn’t seem to be anything on the horizon to change the modest growth,” said Golden. “It’s hard to tell what will happen, but the confusion seems to make for slow growth overall.”
New study: highly educated Democrats are now way more liberal than the rest of the party
Well-educated Americans hold views that put them far to the left of those without college degrees, a divide that has widened over the last 20 years, according to a new study published on Monday by the Pew Research Center.
To be sure, it’s true that those with less education have also moved to the left — but not nearly as much as those with postgraduate education.
In other words, the liberal elite appears to be real.
https://cdn3.vox-cdn.com/thumbor/uJ9s-Va6_InhVHdXJEqulUBPp7M=/1600×0/filters:no_upscale()/cdn0.vox-cdn.com/uploads/chorus_asset/file/6392647/Screen%20Shot%202016-04-26%20at%203.17.51%20PM.png
Twenty years ago, there weren’t that many elites who held uniformly liberal positions, and, similarly, there weren’t that many people with low levels of education who held consistently liberal positions.
Then something changed. College-educated Americans became increasingly persuaded to agree with the typically left-leaning position on a whole range of questions, and the percentage of “consistently liberal” college grads skyrocketed from 5 percent to 24 percent in two decades, according to Pew’s study.
Over that same period of time, those with lower education levels also moved to the left — but by only by a little bit. Of Americans who only finished high school, the percentage who hold “consistently liberal” beliefs only rose from 1 percent to 5 percent.
“Highly educated adults — particularly those who have attended graduate school — are far more likely than those with less education to take predominantly liberal positions across a range of political values,” Pew’s report says. “And these differences have increased over the past two decades.”
Being taught to be a CONFORMIST by cadres of uber-liberal college professor drones equates to being “highly educated adults” ??
Laughable!
It shows their indoctrination is succeeding. Either that, or liberal policies make more sense and only the “educated” are smart enough to see that.
It would be interesting to see what issues are being considered to conclude educated folks are “way more liberal” than many other democrats.
Just a quick blast before I start my day …
America cannot remain an economic power by:
Printing more QE
Perpetual centralized control over economy and our lives
Open Boarders with Third World invasion (they have to go home)
Propping up Asset Prices with cheap interest rates
Growing welfare state with less producers and more takers
Allowing TBTF Banks to exists
————-
That’s just my take …
Based on those points, I could see you supporting either Bernie Sanders or Donald Trump.
How do you wean the addict off of heroin when it doesn’t even want to admit it has a problem?
While I agree with you on 4 out of 6 points, I think things won’t change until the next global recession, which will be directly caused by global QE and slish-sloshing fiat money.
Why my friends moved to the Midwest in search of financial security
http://www.msn.com/en-us/money/personalfinance/why-my-friends-moved-to-the-midwest-in-search-of-financial-security/ar-BBsfgok?li=BBnbfcN
I think people should move to where they have the greatest opportunity. If you have a mediocre job and can’t afford the house you want, why stay in Orange County? I know family is a big reason for many people, but at what point do you decide that it’s simply not worth it? Flights on Southwest are pretty cheap when you need to visit.
I know a family the both husband and wife grew up in Santa Barbara. The moved to Reno in the early 00s because they concluded they would never own a house anywhere near Santa Barbara. Their cost of living was reduced by 30% or more, and they bought a house twice the size of what they were renting in Santa Barbara. They were hurt by the housing bust like everyone else in Nevada, but they still enjoyed a higher quality of life than if they had stayed in the Santa Barbara area.
Bigger house and less expense does not equal a better quality of life. That term is extremely subjective. A person in So Cal could easily have a higher quality of life than a person with a mansion in Nevada.
They were both working class people, and they couldn’t even afford a small condo on their combined income in Santa Barbara. They were truly priced out. They had to make a choice between hope for owning somewhere or a lifetime of paying ever-increasing rents to live where they grew up. Many lower to middle income families face the same choice in California.
A blanket principal reduction would be inequitable for everyone. But, I think there’s a good argument to recalculate principal balances based on sound lending practices.
For example, during the boom NegAms, or Option ARMs, were fairly common. Borrowers would pay less than the principal every month having the remainder tacked onto the principal. I don’t think any of this added principal is justified. The banks shouldn’t profit from their abusive lending practices, so line out that principal.
Second, many loanowners were trapped in high-rate loans. They continued to pay investors relatively high rates as mortgage rates fell because they lacked the equity to refinance. They lacked the equity because they bought at a price peak. This price peak was caused by the banks loosening lending standards – like ignoring equity requirements, for instance.
Once defaults rose, suddenly equity mattered again, and the sheep were trapped. So the banks started shearing the sheep that produced the best wool and slaughtering the ones that didn’t. The pigs took the bounty, and filled the other animals’ bowls with propaganda.
If it’s possible to sort out the cash-out-refis and Heloc abusers, I don’t have a problem recalculating borrower’s amortization schedule based on prevailing 30yrFRMs over the course of the downturn.
Sure NegAm buyers bought more house than they could have, but they also overpaid for that house. So I think it still makes sense to line out the added principal. And it’s not like the banks didn’t get paid interest, they just didn’t get the full benefit of their loose lending “standards”.
I agree with you on the added principal amounts. Also, I think the junk fees that were added on to loan modifications were also inappropriate. I can’t see reducing principal down below the original amount borrowed under any circumstance.
[…] Principal reduction is the worst remedy for the underwater borrower crisis http://ochousingnews.g.corvida.com/principal-reduction-is-the-worst-remedy-for-the-underwater-borrower-cr… […]
Completely agree and apparently so does the US government based on the policies of the last 8 years.
Lowering cost of borrowing was the fix they used. But I think they know this is a temporary fix. Mortgages could easily blow up like popcorn if interest rates go up. I certainly don’t have faith that future administrations are going to have the ability or will to keep a lid on mortgage rates.
With the federal reserve still directly purchasing mortgage-backed securities, they can exert a strong influence on mortgage rates if they want to. If investors deserted the MBS market, the federal reserve could theoretically buy it all. Would they do this? I don’t know, but based on what Japan has been doing, it’s certainly possible.