So John Q. Borrower paid too much for a house, or borrowed too much against his house and is now underwater. To add insult to injury, his income has deteriorated to the point he can’t afford the place. In times past the solution would have been for Mr. Borrower to downsize or move in with relatives, but apparently the Obama administration finds that solution unamerican. Instead, Obama wants banks to reduce the principal and eat the losses. [Thanks L!]
The administration wants a commitment from loan servicers to reduce loan balances for borrowers who owe more than their homes are worth, and that such costs would not be borne by investors who bought mortgage-backed securities, the newspaper said, citing people familiar with the matter.
It would thus force servicers that mishandled foreclosure procedures to bear losses by writing down loans they service on behalf of clients such as Fannie Mae, Freddie Mac and other investors, the newspaper said.
A settlement would let banks devise their own modifications or use existing government programs, and require them to reduce second-lien mortgages when primary mortgages are modified, the newspaper said, citing people familiar with the matter.
I find myself in the position where virtually everything I own, from my living room sofa to the shirt on my back, is worth less than what I paid for it. I wonder if there is any way the government can legislate a solution where someone else can eat the losses instead of me?
L said of these underwater borrowers:
All the refis that I have seen have gone to borrowers that still couldn’t make their payments. They have used their credit cards to live on and pay their mortgage. Now there is now way for them to survive, they are too buried in debt.I looked at three of these the night before last. They wanted to do a short sale, but it won’t help their credit. They would be better off to wait and hope for a “cash for keys” deal.
Lenders should not be allowed to mishandle foreclosures. They should face penalties for wrongful foreclosures and sloppy paperwork. The cost of these errors however shouldn’t be a principal reduction. The punishment should fit the crime, and it is not the fault of the lender if the borrower borrowed too much.