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Underwater borrowers deserve principal reductions

Underwater borrowers deserve principal reductions

What’s up with mortgage rates? Jeff Lazerson of Mortgage Grader in Laguna Niguel gives us his take.


From Freddie Mac’s weekly survey: The 30-year fixed rate was 1 basis point higher, landing at 3.67 percent from last week’s 3.66 percent. Ditto for the 15-year fixed, landing at 2.94 percent, up from last week’s 2.93 percent.

The Mortgage Bankers Association reports a 2.3 percent decrease in loan application volume from the previous week.

BOTTOM LINE: Assuming a borrower gets the average 30-year conforming fixed rate on a $ 417,000 loan, last year’s rate of 4.27 percent and payment of $ 2,056 is $ 144 more than this week’s payment of $ 1,912.

WHAT I SEE: From rate sheets hitting my desk that are not part of Freddie Mac’s survey: Locally, well qualified borrowers put 10 percent down, and get a super low rate on a piggy-back loan, avoiding mortgage insurance entirely. The no-cost, 30-year fixed rate on the first mortgage is 3.95 percent up to a $ 625,000 loan amount. The 30-year second mortgage is a ridiculously low 3.75 percent (lower the rate on the first) with a loan amount up to $ 250,000.

WHAT I THINK: Holy Smokes! A just released research paper indicates that loan modification programs that were supposed to help homeowners actually boosted the number of people deliberately defaulting on their mortgages.

Entitled “Strategic Defaults Induced by Loan Modifications,” the report lays claim that modification programs like HAMP (Home Affordable Modification Program) actually induced some to be strategic (purposeful) defaulters.

One of the two authors, Xinlei Zhao, works in the Risk Analysis Division at the office of the Comptroller of the Currency.

In general, loan modifications temporarily reduce the interest rate and payment on a mortgage and extend the loan term to offer payment relief to homeowners, typically underwater borrowers.

According to Corelogic’s fourth quarter 2014 Equity Report, 5.4 million U.S. homeowners with a mortgage, or 10.8 percent, are still underwater.

President Obama’s goal of helping 9 million underwater homeowners fell woefully short. Loan servicers rejected some 5.5 million HAMP applicants. HAMP modifications amounted to 1.4 million borrowers as of last June, with about 25 percent re-defaulting.

Lenders and borrowers were spinning their wheels, with approximately 80 percent of HAMP modifications getting denied. And, how many millions of desperate borrowers were ripped-off by loan modification scam services that are still prevalent today?

Now that the Pandora’s Box has been opened with our new standard being bailout the borrower however and wherever possible, let’s at least get it right.

The answer is a one-time principal reduction for seriously underwater borrowers. This is a much better incentive for the hapless homeowner than a temporary payment reprieve of sorts.

As part of its loan modification menu, the Veterans Administration allows loan servicers to offer principal reduction, according to Andrew Trevayne, VA’s assistant director for loan and property management. “It’s at the discretion of the lender to evaluate and determine,” he said.

The Orange County Register – News Headlines : Real Estate News