Home > Avid Law Center > Fixing the Housing Market: The Principal of the Matter

Fixing the Housing Market: The Principal of the Matter

Housing analyst Laurie Goodman says it’s all about the principal when it comes to providing assistance to both lenders and borrowers in this housing crisis.

In a recent CNN Money article Laurie estimates 2.5 million homes have already fallen to foreclosure since the bubble burst, and another 4.5 million mortgage holders have given up paying and are likely to lose their homes. She also warns that more than 10 million of the nation’s 55 million mortgage holders could default by 2018.

So what does Laurie recommend to fix the housing market? She explains that efforts to-date have fallen flat because they only benefit the borrower in the short term and don’t benefit the lender at all – mortgage modifications for example “aren’t helping because they only extended payments or reduced interest rates and don’t fix the fundamental problem of unsupportable debt loads.”

Which is why she says that principal reduction on the mortgage note is the only way to provide relief to borrowers that also benefits lenders. She found that lenders that reduced the principal (or total amount owed) by an average of 26% were far less likely to have to foreclose, and they actually provided mortgage back securities investors higher returns.

However, many banks are refusing principal-reduction deals to avoid the immediate write-downs that would be required. Additionally, many mortgage servicers are refusing principal-reduction deals because their fees are tied to the amount of principal rather than to the ultimate payback to investors.

Laurie states that banks “are ridden with conflicts of interest” that pit them against the interests of borrowers and investors, and many of the rules in place now are extremely large-bank-friendly, but borrower- and investor-unfriendly.” But while the housing crisis stays stagnant, that may be changing as the Treasury Department and several state attorneys general are encouraging lenders to offer principal-reduction options and “shared appreciation mortgage” (SAM) modifications.

If you are a homeowner looking for debt relief to avoid foreclosure, we encourage you to speak with an attorney, who is familiar with the changing laws and options available for homeowners, who can fight to make sure you receive a deal in your best interest, not the bank’s.


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