Tag Archives: Principal Writedown

With numbers from a CoreLogic report revealing 22.8 percent of borrowers are underwater, principal reduction has been eyed as a key solution to keep borrowers in their homes. The Center for American Progress has released a report detailing solutions to the ""moral hazard"" issue. One is to make principal reduction a one-time program open to borrowers already delinquent; another is to open the program only to current borrowers who are at-risk of default; and the third is ""shared appreciation"" modifications.

NPR reported Friday that Fannie Mae and Freddie Mac might consider principal reduction as a means to help underwater homeowners. Edward DeMarco, acting director of the FHFA, has stood firm in his decision to not allow for principal reduction, despite mounting criticism from Democrats and petitioning from organizations to have DeMarco fired. ""NPR and ProPublica have learned that both firms have concluded that giving homeowners a big break on their mortgages would make good financial sense in many cases,"" NPR stated in its story.

Details of the $25 billion settlement involving state and federal officials and the five largest servicers will change how liens are prioritized, and in turn, opponents say, will benefit banks but hurt investors. Typically, in cases involving delinquent loans, the second liens are written off before a first lien takes any losses. Under the settlement, first and second liens will share in the losses equally, with both getting written down proportionally instead of wiping out the second lien, which tends to yield a higher return since it includes a higher risk.

The FHFA's decision to not allow for principal reductions on Fannie Mae and Freddie Mac loans came under sharp criticism during a Senate subcommittee hearing Thursday. John DiIorio, CEO of 1st Alliance Lending, a mortgage origination firm, argued in support of principal reduction, even when analyzing the benefits from a bottom-line perspective, not simply as a form of aid. Laurie Goodman, senior managing director of Amherst Securities, said there were a number of flaws in an FHFA study used to defend the decision to not apply principal forgiveness, and discussed three major criticisms and ""technical flaws.""

According to documents filed in federal court Monday, Ally Financial formerly GMAC will offer principal reductions beyond what is required of the majority of the five banks in $25 billion the national mortgage settlement. While the general rule for principal reductions required through the settlement is to lower principal to no more than 120 percent of a home's value, Ally will offer reductions of as low as 85 percent in some cases where borrowers are considered likely to default. Other homeowners with high-risk loans may receive reductions bringing their loan to 105 percent or 100 percent of their homes' current values.

Some Bank of America borrowers may be in for principal reductions in amounts exceeding $100,000, according to the latest developments in the settlement the bank and four other large servicers made with state and federal regulators. While the other four servicers in the national settlement are being required to diminish principal so underwater borrowers have loan-to-value ratios of 120 percent or less, BofA will be reducing principal for about 200,000 homeowners to fall in line with current market values.

The principal reduction debate wages on with the Federal Housing Finance Agency (FHFA) standing firm in its resolve that the strategy is not the best option for the GSEs. ""Both companies have been reviewing principal forgiveness alternatives. Both advised me they do not believe that it is in the best interest of the companies to do so,"" FHFA Acting Director Edward DeMarco told the Senate Banking Committee. One senator asked why banks then are turning to principal forgiveness for 20 percent of modifications on their own loans.

The first details on how mortgage servicers must fulfill their end of the $25 billion federal-state settlement can be found within the 233 pages of Wells Fargo's annual filing with the Securities and Exchange Commission. As expected, first-lien principal reductions carry the most weight in terms of credit towards each servicer's financial obligation. Forgiveness of past due payments for unemployed homeowners garner dollar-for-dollar credit, as do costs associated with demolishing vacant, foreclosed properties.

Principal reductions have been approached with some reluctance and much debate throughout the industry, but as part of the recent $25 billion settlement with the state attorneys general, the nation's largest servicers have agreed to administer the loss mitigation tactic. Fitch maintains the issue of principal reductions is not a simple ""yes"" or ""no"" question, and ""if not implemented carefully, a wide-ranging principal reduction program could potentially increase defaults among borrowers who would otherwise remain current.""

After more than a year of intense negotiations, 49 state attorneys general and the nation’s five largest mortgage servicers reached a $25 billion settlement on February 9. While the agreement allotted specific amounts to go towards certain areas of relief, many are wondering how the settlement will affect those represented. Moody's Analytics has released a report offering up an analysis of the settlement's expected impact on both banks and borrowers.