Obama Administration Pushes for Forced Loan Principal Reductions

If the current administration gets its way, some of the country’s largest banks could be forced to pay for billions of dollars in principal reductions on loans. The administration is citing “breakdowns in mortgage servicing” as the cause for the settlement, and some state attorneys general are also asking for civil fines and modifications for troubled borrowers. The administration believes that a settlement could “help lift a cloud of uncertainty that has stalled the foreclosure process since last fall” during the robo-signer debacle. Currently, economic recovery is stalled along with the foreclosure market according to many experts.

One of the benefits of the deal according to many parties is that there would not be new government programs created to reduce principal. HAMP (Home Affordable Modification Program) has been extremely controversial and, by most accounts – including that of TARP inspector general Neil Barofsky – has been a disappointment if not an all-out failure. The administration is proposing that banks handle write-downs on loans, but that they also bear the cost of those writedowns rather than passing them on to investors. The settlement revolves largely around lenders agreeing to “eat” these losses.

However, issues such as differences of opinion on who was harmed by last fall’s breakdown – and how much – and whether or not cutting principals actually improves payment patterns hinder parties from reaching a settlement. Furthermore, there will be, of necessity, a limit on the number of mortgages that can be “cured” with any settlement. All parties are hoping to come to some sort of agreement, however, so that lenders do not have to face civil actions, smaller but myriad penalties and additional uncertainty in coming months that could leave the foreclosure market as well as the rest of the real estate market and the economy at large hanging in limbo.

Congresswoman Very Concerned About President’s Approach to Foreclosure Fraud

While president Obama diligently works to hammer out a settlement with major lenders that could force big banks to pay out millions or even billions of dollars in fines, principal reductions on loans and civil penalties, one congresswoman is not only not satisfied, she’s concerned that the president is failing homeowners across the country. Congresswoman Maxine Waters (D-CA) issued a statement accompanied by her own report on the matter indicating that she is “very concerned” about what she is seeing in the news. By her own account, there are millions of foreclosures to come and 3 million out of 4 million homes “are yet to be saved from the foreclosure crisis.” Waters previously criticized the administration’s handling of the Bank of America settlement with government-controlled Fannie Mae and Freddie Mac, saying it amounted to a “backdoor bailout that props up the bank at the expense of the taxpayers”.

Now, Waters warns that “small settlements will result either in borrowers willing to receive insignificant principal reductions, or reductions only being available to a small subset of troubled borrowers.” She also criticized both the president and his administration for failing to deliver on the change promised during the campaign for his first term, saying “I myself remember Obama calling for change during his first term, but I have yet to see it. It seems as though the programs such as HAMP are complete failures themselves.” She went on to say that the government’s programs are “no better than the actual lenders’ programs” and that “several million homeowners remain HOPEless” at the present time.