No Plans for Mortgage-Principal Reductions
The Wall Street Journal
By Michael Crittenden And Ruth Simon
January 20, 2010
Despite increasing pressure to take more aggressive steps to keep troubled borrowers in their homes, the Obama administration said Wednesday that it had no immediate plans to alter its foreclosure-prevention program by increasing its reliance on reducing loan balances.
The administration's statement came as attorneys general and banking regulators in 14 states warned that policy makers needed to do more to stem the tide of foreclosures.
The Obama program, announced in February as a cornerstone of the administration's efforts to stabilize the housing market, has been running into increasing criticism as delinquencies have mounted. The program has focused on reducing loan payments to affordable levels through interest-rate reductions and other changes in loan terms. But state officials and others say it needs to address falling home prices through principal reductions because many homes are now worth less than their mortgages.
"The failure to reduce principal jeopardizes the sustainability of loan modifications," Mark Pearce, North Carolina's deputy banking commissioner, said at a briefing for reporters.
In a related development, the Treasury Department said the administration next week will issue new guidance for lenders to deal with a looming deadline that is putting many homeowners participating in the program at risk of disqualification because of paperwork problems.
More than 900,000 homeowners have begun trial modifications under the program, but documentation issues are hampering efforts to convert those to permanent fixes. Last month, the administration gave many borrowers in the program an extension until Jan. 31 to provide the documents. But the administration said last week that it doesn't plan to extend the deadline further.
New York State Banking Superintendent Richard Neiman said Wednesday that he believed that about 450,000 homeowners who have made at least three required trial payments "face the prospect of foreclosure on January 31st strictly on account of documentation issues."
Administration officials haven't said how many borrowers in the program would be affected by the approaching deadline. "We expect to issue guidance to servicers next week to expedite conversions of current trial modifications and provide guidance on documentation," Assistant Treasury Secretary Michael Barr said.
Under the program, borrowers must make three trial payments and provide a hardship affidavit and other required documents. On Friday, the administration released a report that said only 7% of the homeowners who received trial modifications on their loans through the plan had received a permanent reduction as of Dec. 31.
Mortgage companies say many borrowers haven't provided some or all of the required paperwork, while borrowers complain they are asked for the same documents multiple times.
State officials on Wednesday called on the administration to loosen documentation requirements and expand the use of principal reductions. A report issued by state attorneys general and state banking regulators found that more than 70% of loan modifications resulted in an increase in the principal amount owed as unpaid interest, fees and other charges were rolled into the loan amount.
The report, by the State Foreclosure Prevention Working Group, said current efforts are failing to keep up with the number of borrowers falling behind on their loans. Only four in 10 borrowers who are at least two months behind on their payments are involved in any sort of loss-mitigation effort. Without more aggressive steps, including a focus on principal write-downs, foreclosures will continue to weigh on the economy, the report warned.
"Despite efforts of servicers, homeowners and the government, the foreclosure crisis continues to worsen. These signs point to more foreclosures in 2010 than in 2009," the report said.
The states' report, based on data from 13 mortgage servicing firms, offered a stark view of the housing market. Through the end of October, there were 1.7 million mortgages at least two months behind on payments, while the number of loans in the process of foreclosure increased by 52% between October 2008 and October 2009, the report said.
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