More Principal Reducing Loan Modifications Urged

January 5, 2010 No Comments »

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Former FHFA boss James Lockhart told CNBC today more aggressive loan modifications were necessary to stem the rising foreclosure numbers and put an end to the housing mess.

He noted that a quarter of all homeowners with mortgages are underwater, meaning they owe more than the properties are currently worth.

As a result, even those able to make monthly mortgage payments may have little incentive to do so, increasing so-called strategic defaults.

Lockhart pointed to rising bankruptcy numbers that seem to illustrate the trend; he added that the stigma to walk away is gone, potentially opening the floodgates for more strategic defaulters.

There’s also the millions of homeowners unable to make mortgage payments because of unemployment, loss of income, and interest-rate resets.

To address the problem, a number of aptly named loan workouts have been offered up, but they’ve done little to resolve the problem, and may have even exacerbated it.

Unfortunately, many troubled borrowers have only received repayment plans that increase their monthly payments, leading to re-default rates higher than 50 percent.

That would seem to simply delay a growing problem…

Of course, Lockhart, who stepped down as FHFA boss in August before becoming vice chairman of WL Ross & Co., a distressed investment firm, has different motivations nowadays.

But principal balance reductions seem to be the way forward, seeing that home price depreciation was highlighted as the leading driver of default.

With regard to Fannie Mae and Freddie Mac, which are overseen by the FHFA, Lockhart said we must ultimately get the public sector out of housing.

(photo: nickbramhall)

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