Coalition Proposes Mortgage Principal Reduction Plan

This week a group of mortgage investors proposed a principal reduction plan to congress.  This proposal will encourage a new phase in the HAMP program and would also give homeowners the ability and  incentive to pay their mortgage loans.  These proposals are from the Mortgage Investors Coalition, lead by the Fortress Investment Group, a New York based alternative asset management firm.

Micah Green, an attorney representing the Mortgage Investors Coalition,which represents holders in $100 billion in mortgage bonds, says,  “instead of demanding full write-downs on second liens (they) are prepared to consider a principal reduction plan where losses are shared, adding, this softened position on second liens could help break the impasse keeping big bank servicers from forgiving principal”.

The coalitions proposal conforms more to U.S. Senate leader Harry Reid’s request of Treasury and housing officials for a “more aggressive” principal forgiveness component to the U.S. government’s Home Affordable Modification Program.  Since the inception of the HAMP program it has been shackled with difficulties in completing mortgage modifications.

The incentive to deal with underwater loans, estimated in excess of 30% of all mortgages, has gained momentum.  Signs that show borrowers are choosing to default even if they can afford the mortgage are increasing.  “Nearly 10 million loans that are at least 115 percent of the property’s value are at risk of such “strategic defaults”, according to a letter from the coalition to House Financial Services Committee Chairman Barney Frank.

Under the coalition plan, investors would forgive principal up to 96.5% of the homes’ value, this will clear a path for borrowers to refinance into a federally backed mortgage.  If the principal reduction can be offered, the Treasury could limit moral hazard by limiting eligibility to homeowners already behind in their mortgage payments.

Investors are divided on this plan.  According to the coalition, “at risk is the sanctity of legal contracts, which typically require second-lien investors to take a full loss before firsts are hit. While that understanding is defendable and correct, it may also be impractical”.

Micah Green says, “principal reduction could be a natural evolution for HAMP, adding, investors want it because they, like homeowners, are in bad loans”.

Related posts:

1. Obama’s Mortgage Relief Plan
2. Making Home Affordable
3. More Foreclosures Imminent
4. Report: HAMP Program Only Making A Dent In Foreclosure Crisis

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