The following article was released May 12th and we wanted to post it in its entirety.
President Obama said that struggling homeowners need even more help from the banks, in a CBS town hall that aired Thursday.
Calling housing “the biggest headwind on the economy right now,” Obama broached two relatively new ideas for the White House: Longer-term mortgage modifications and principal reductions “in some cases.”
Both ideas would require Congress to pass laws to force the banks to cooperate.
“If we were there for you [banks] when you got into trouble, then you’ve got to be there for the American people when they’re having a tough time,” Obama said during the CBS program which was taped on Wednesday.
In response to a question posed by Nancy Logan of Virginia, an underwater homeowner whose three-year mortgage modification will expire in January 2012, Obama said that reducing some mortgage principals would benefit the banks as well as homeowners.
“In addition to these short-term loan modifications, we want to see if we can get longer-term loan modifications. And in some cases, principal reduction, which will be good for the … person who owns the home, but it’ll also be good for the banks over the long term,” Obama said.
Foreclosures crush home prices
Obama’s mention of principal reduction, in particular, is sure to stir Wall Street banks. When Obama campaigned, he had talked about pushing for policy to give bankruptcy judges the ability to write down principal owed on homes whose owners are bankrupt.
But when he took office, the president stood on the sidelines of legislation that would have allowed principal reductions, and his administration said that current housing policy was good enough.
Since then, the president rarely, if ever, publicly discussed principal reductions.
Big banking groups have traditionally lobbied hard against any new policy that would open the door for more principal write downs.
At least one banking group said they weren’t opposed to a policy that would open the door for mortgage modifications that spanned longer periods, but they can’t support legislation that invites more principal write downs.
“Banks are committed to helping Americans struggling with their mortgage,” said Scott Talbott, senior lobbyist with the Financial Services Roundtable, a bank lobbying group. “Banks have already worked directly with over 4 million Americans to make long-term mortgage modifications.”
During the town hall, Obama also defended his administration’s housing programs, which one independent inspector general had criticized as a failure. House Republicans passed a bill to kill the administration programs that give banks incentives to modify mortgages.
“The problem is .. that the need is so great. So it’s like you have a huge pothole, and you only have so much gravel,” Obama said. “If you’re talking about $5 trillion worth of home value, and a program that only has a few billion dollars, then there are a lot of people who are not going to be helped.”
Source: CNN Money
The issue is, unless Congress forces and oversees banks who took bailout money to reduce principal and allow longer term modifications, this will never actually happen. The reason is because most mortgages are backed by PMI (Private Mortgage Insurance) which protects the lender if the homeowner should default. Therefore, let’s say you have a $200K mortgage and your home is now worth $125K – it is not in the bank’s best interest to give you a $75K principal reduction, they’d rather see you short sale it for $125K and then seek the balance from the PMI company so they get every bit of their $200K back. Even if the home goes to foreclosure, the bank can still get their money back after the fact from the PMI company, although it does cost them more to process foreclosures, which is why the lenders want to see homeowners do a Short Sale as a first option. As Realtors, we see this all the time. This is why banks are much more responsive to allowing Short Sales than they are Loan Modifications – it just keeps more money in their pockets. We recently attended a course which told us that last year, less than 1% of homeowners who applied for a loan modification actually was able to successfully receive one.
Great thoughts Mr. President, but how are you going to make sure this plays out in favor of the homeowner and not the lenders when they can always default to their PMI companies? We sure hope you can find a way.