Mortgage Reductions in the Future?
Fannie and Freddie On Board
Many of our bankruptcy clients find themselves with mortgages that significantly exceed the value of their homes. Since the 2007 collapse of the housing market, this problem has persisted and is often one of the principal causes of a bankruptcy filing (other causes may include loss of job, loss of health with the ugly specter of excessive medical expenses and divorce).
In the areas of our practice, generally from Northern Los Angeles to the northern extremity of San Luis Obispo County, the market is only now beginning to either bottom or show the beginning of a gradual recovery. (In some areas, you may have to put a stick in the ground to determine whether the market is moving upward or downward). Throughout this period, we have frequently been promised by politicians and lenders, but have only occasionally encountered, a reduction in the principal amount of a client’s mortgage as a component of a restructure proposal.
Principal reductions, however, may finally become a reality because Fannie Mae and Freddie Mac appear to be finally on board with promised changes to the Keep Your Home California program. Recently, state officials administering the program eliminated a mortgage lender’s requirement to match the funds a taxpayer must pay to receive a mortgage reduction according to LA Times reporter, Alejandro Lazo, in an article published May 8, 2012. See, firstname.lastname@example.org.
The State initiative uses federal funds from the 2008 Wall Street bailout to aid borrowers at risk of foreclosure. It’s had lackluster participation since started in 2011 because of bank resistance. By eliminating the lender’s matching fund requirement, state officials hope to make principal reductions easier for borrowers to obtain.
Fannie Mae and Freddie Mac Own About 62% of Outstanding Mortgages in California
On Monday, Fannie Mae and Freddie Mac confirmed their intention to participate. The two lending giants own about 62% of outstanding mortgages in California according to the state attorney general’s office. Previously, neither lender has elected to participate in principal reductions because of their apparent concerns about additional costs to mortgage write downs with current available funds. They and other lenders argued that principal reductions aren’t worth the cost and may create a “moral hazard” by providing a windfall to delinquent borrowers.
Because Fannie and Freddie are market leaders, they hold a large share of existing mortgages and, according to Paul Leonard, California director of the Center for Responsible Lending, their participation is “a really important step forward.” As part of a $25 billion settlement this year, five of the nation’s largest banks agreed to reduce the principal on some of their loans. Housing advocates believe that shrinking the mortgages held by underwater borrowers would give a boost to the housing market by giving homeowners an incentive to continue making payments on their loans.
Changes to the state program are scheduled to begin in early June when the agency will increase to $100,000 from $50,000 the amount of aid available to borrowers. Representatives for the nation’s three largest banks, JP Morgan Chase & Co., Wells Fargo & Co. and Bank of America Corp., say they are evaluating the changes.