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Forget loan forgiveness

By Polyana da Costa · Bankrate.com
Monday, October 31, 2011
Posted: 1 pm ET

You may have heard talks that lenders are being pushed to help struggling homeowners by forgiving part of the principal owed on their mortgages.

Forget it.  It's not going to happen. That's pretty much what Federal Housing Finance Agency Acting Director Edward DeMarco said during an interview that aired on C-SPAN this weekend.

"The idea of reducing principal or forgiving principal for borrowers who are underwater in their mortgages has been widely discussed … and has gotten a lot of attention in the last 18 months," DeMarco said. But, after studying the matter, FHFA has concluded that principal forgiveness "does not accomplish our conservator mandate."

In other words, it doesn't make financial sense for Fannie Mae and Freddie Mac to write down principal on loans. Without the agency's approval, servicers couldn't offer some sort of principal reduction program, even if they wanted to, because the bulk of these loans are owned by the two entities.

Proponents of principal reduction efforts, including attorneys general in several states, say such a measure would help to prevent foreclosures and contribute to the housing recovery.

But critics say principal write-downs would be a bailout, or a reward to borrowers who took out loans they couldn’t afford.

What's your opinion? Do you think lenders should offer loan reductions to struggling borrowers?

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10 Comments
bobby morgan
November 03, 2011 at 10:27 pm

No!! No forgiveness on loans. The money was loaned in good faith. It is a debt and people must learn to honor thier debts. An awful lot of people bought more than they could afford and now must pay the piper.

amccoy
November 02, 2011 at 11:33 pm

The bank bailouts didn't cost the taxpayers money. What IS costing us money is the current fiscal policy. How much interest is the money you have in the bank making right now? The low interest rates are good for companies that want to borrow money, but bad for responsible citizens.
We have been taught that inflation is bad, but homeowners typically owe more than they make in a year, so inflation is actually a good thing. Salaries increase along with inflation, so for that year things are more expensive, and people therefore think inflation is bad, but the reality is for those with a mortgage, inflation is good. If you make 100K per year now and have a 1 million dollar mortgage,your mortgage payments suck up most of your income, but if in 10 years you make 1 million per year, your mortgage payment seems trivial.
That huge national debt...pay it off with monopoly money. Okay, we don't want to go that extreme, but the concept is the same. We need to stop listening to the super wealthy who don't want their wealth eroded saying inflation is bad. Inflation is not only good, it is precisely what this country needs.

John Carl
November 02, 2011 at 6:24 pm

The bottom line is the Financial Collapse was caused by the greed of Wall Street Executives and Banks, who originated and bought toxic loans and fraudulently repackaged them as securities to make billions of dollars. These people will say that people bought homes that they could not afford. People were placed into 2 year ARMS with 3 year hard pre-pay penalties and they defaulted on these loans because they could no longer afford the payments. There were other loans like W-2 Stated Income Loans that Lending Institutions provided. These types of loan packages were made available by the Lending Institutions, who offered high yield spreads or rebates to mortgage brokers for placing these loans.

There are millions of homeowners who are current on their mortgages, but are upside down or underwater because of low appraisal values. There has to be a system in place for reducing principal balances for homeowners who are current on their mortgages. There should be some type of incentive system in place to help struggling homeowners to ultimately receive principal reduction benefits. Ultimately the monies that the Feds are suing the lending institutions should go towards reducing the loan balances of homeowners. That would be the fair thing to do, but our legislative system will not do this.

avid.flyer
November 02, 2011 at 4:47 am

This is a idiotic move laoning money after bad, We can't get this mess cleared up till we stablize the market. Giving loans out will only make our pain last longer and will not fix anything in the long run. We will be visiting the same problem down the road in say the next 3 to 5 years. Until our econemy stableizes and people start getting hired will be able to get a handle on this. As time goes on more people go under water and the only ones wh osurvive are the rich cause they are the only ones who can afford to buy these homes. The goverment has reached the end of it's rope at lending and giving money away,dumb dumb ideal wait till all the social security claims start hitting in the next 5 years we are in for a big mess.

Anon
November 01, 2011 at 6:23 am

No bailouts. Bailouts (at the individual OR higher levels) cause people to take bigger risks than they would otherwise take. Taking risks isn't bad, per se, but you shouldn't do it if you aren't prepared for the loss that is paired with the risk. Once bailouts *start* (which they did awhile ago), people want them for everything and nobody, not even the US government, has enough resources to bail everyone out indefinitely.

Put another way - If your messes are going to be cleaned by somebody else, you don't try as hard to prevent them. Even my young children understood this as early as age 2. Hand them the paper towels and they stop making so many spills.

bill
November 01, 2011 at 4:09 am

where the house now at $30,000 here in bloomington indiana
47401 none here at all why

RationalMan
October 31, 2011 at 4:54 pm

To bumrocky, I understand where you are coming from but a bailout for these borrowers is an indirect bailout for you.

Again INDIRECT. The reason is because Equity is a fictitious number. No one has any equity until they sale their property because no one knows the True market price until point of sale.

Bailouts of other homeowners will keep market prices from being as bad as they could be, thus increasing Your true market value. This means you will be in a better (not necessarily good) equity position because of the bailout.

Or don't bail them out, see a increase in the decline of the market value and further destruction of your equity position. Kinda of cutting off your own nose to spite your face.

Yeah, it is not fair and you can look at the person in the mirror and know you did right, but taking away emotions from the equation, the math is clear.

bumrocky
October 31, 2011 at 2:40 pm

Lenders should NOT offer loan reductions to struggling borrowers. What about people like me who put 20% down, have been paying off their principle, and are still breaking even or even still have a little bit of equity? Do I get a free $20,000 write down just because I don't want to pay my mortgage anymore? Where does it end?