Modifications,Short Sales,Deeds in Lieu,WriteDowns

US considers mass mortgage write down

Posted on Friday, March 18, 2011

It was the rant from Chicago that resounded in Washington. In 2009, Rick Santelli, a reporter from CNBC, captured the mood of a sizeable portion of the country when he railed against government efforts to “subsidise the losers’ mortgages”.
To cheers from the CME Group’s trading floor, he went on to say: “This is America! How many of you people want to pay for your neighbours’ mortgage that has an extra bathroom and can’t pay their bills?”
Two years’ on, the centrist president’s manoeuvring and the slow economic recovery have dampened ardour for anti-government demonstrations that Mr Santelli and the Tea Party movement displayed.
But now the Obama administration is involved in talks that would go much further than the mortgage modification efforts of 2009, going so far as to write down the principal – the debt outstanding – on thousands of mortgages.
Rather than rely on a recalcitrant Congress to launch the scheme, the funding mechanism is a neat one: the 14 biggest mortgage servicers would pay up to $20bn of the cost as punishment for a series of failures that led to foreclosures being halted across the country last year.
Principal writedown has long been advocated by consumer groups as the most efficient way to help the biggest possible group of struggling homeowners. Conflicting incentives and the resources needed for voluntary loan modification programmes have kept the effort modest so far.
On Monday, protesters’ picketed a conference of the attorneys general in Washington, calling on them to push ahead with big fines and mandatory principal writedowns.
Government officials agree the bang for the buck from principal writedown would be large. A one-off reduction, perhaps to a 97 per cent loan-to-value ratio, would kick-start the housing market and improve consumer confidence, they say.
But others remain sceptical. There are the administration officials who worry about the political impact, the reawakening of Santelli-style protests as thousands of prudent Americans watch less fortunate or more reckless neighbours receive a bail-out.
In the second camp are regulators who think it might not be legally justifiable to use fines from the foreclosure mess as funding for such a programme.
It has been widely assumed that banks will accept whatever terms are put to them to draw a line under the issue and avoid reigniting anger. But some officials fear an outsized fine that cannot be justified by harm perpetrated on homeowners could be struck down in court.
It is still unclear whether all the agencies will sign on to the same terms. The attorneys general last week sent a proposal to the banks that include new procedures to make it easier for delinquent borrowers to lower mortgage payments through loan modification.
The new procedures would prohibit banks from foreclosing on borrowers while the terms of their loan are being considered for a modification, a practice that has become common in the current housing crisis.
The banks will have an opportunity to present a formal response to the settlement terms before negotiations begin. None of the major banks under investigation would comment on the investigation or the proposed settlement.
By Tom Braithwaite in Washington and Suzanne Kapner in New York; FINANCIAL TIMES

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