A lawyer for some of the country’s biggest mortgage lenders says that even though attorneys general in all 50 states are investigating their lending practices, the potential response of forced loan modifications is definitely off the table, but the states are saying, "we’ll see about that."
Against this backdrop, the pace of loan modifications remains slow. The government’s Home Affordable Modification program (HAMP) helped 434,716 homeowners get permanent loan modifications through the first seven months of 2010, while the Treasury Department cancelled temporary loan modifications for 616,839 American homeowners.
Banks still don’t want to pick up the slack, and no strong-arming by the government seems to work. But one idea picking up steam among economists and state attorneys general is more widespread mortgage loan principal reductions for homeowners who make their monthly mortgage payments, but are having difficulty with it.
Yves Smith, the author of the book, Econned: How Unenlightened Self-Interest Undermined Democracy and Corrupted Capitalism, sums this idea up nicely in an Oct. 30 op-ed in The New York Times.
“One measure that both homeowners and investors in mortgage-backed securities would probably support is a process for major principal modifications for viable borrowers; that is, to forgive a portion of their debt and lower their monthly payments.
This could come about through either coordinated state action or a state-federal effort.
The large banks, no doubt, would resist; they would be forced to write down the mortgage exposures they carry on their books, which some banking experts contend would force them back into the Troubled Asset Relief Program. However, allowing significant principal modifications would stem the flood of foreclosures and reduce uncertainty about the housing market and mortgage securities, giving the authorities time to devise approaches to the messy problems of clouded titles and faulty loan conveyance.”