Principal Reductions a Hot Topic in Congress 14

FHFA mortgage principal reductionsI’ve been hearing a lot of talk in the comments section about the pressing need to pursue principal reductions for underwater homeowners. Apparently this blog gets more attention than I realized because the idea has finally penetrated the thick heads of some members of Congress. I’m sure now matter how the eventual debate on this topic goes it will be a fun battle to watch. Here’s what’s happening now:

The FHFA has been requested multiple times to turn over its study on what effect principal reduction would have on the housing market. The FHFA has, of course, refused to turn over any information, we can all assume because it might actually support doing it. So some members of Congress are suggesting to subpoena the information. It seems the Federal Reserve thinks there’s some merit in principal reductions, a good number of Congressmen do, and certainly some homeowners think it’s great.

On the other hand, people are worried that the cost of this thing will eventually hit the taxpayer. Which means other homeowners who are actually keeping up with their mortgage payments will feel the hit from those less fortunate. As in any tough economy there are hard decisions that need to be made. But no matter what I think the information needs to be made available to everyone.

We won’t gain anything by hiding from the truth so let’s look out housing situation square in the eyes and see who blinks.

Do you support principal reductions? Do you think they’re the worst thing that could happen? Leave a comment and tell me why.

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14 thoughts on “Principal Reductions a Hot Topic in Congress

  • Jiacadoro

    Principal reductions is a big mistake!! Does it suck to be underwater on your mortgage after only a few short years? Yup! Is it annoying you can't refinance at a lower rate because you're underwater? Yup! But a buying a home is an investment, a long term one at that. It will take you longer to build up equity because of the current housing market, but what we experienced up until the housing collapse should never happen again. It was a result of corrupt circumstances that have since been well documented.  People buy homes to eventually own the roof over their head, not to turn a profit in a few short months without doing anything to the property.  The Government wants to help the Housing Recovery? Work towards fixing the job market and allow investors to buy the properties no one wants so they can turn a dump, into a livable home.

  • Sprake3

    Millions or perhaps billions of paper dollars have been lost to Americans every where.  Appraising the current market value of our homes and redoing the mortgages based on this value would help millions of Americans who still believe in the American dream.  We are having difficulty meeting our obligations and home foreclosures are still in the pipeline.
    Guess what! We want to stay in our homes.  We did not foul up the economy, the Gov't did.
    You investors can still purchase vacant homes and turn a dump into a livable home. And thanks for doing that!

  • Lori

    This is the only way to get the market back on track!
    At todays values!
    The Banks have already got their money and they need to give the Home Owner that can pay the mortgage at the current value a loan at that value.
    The Principal balance on the note needs to be at  todays value.
    I thought that Banks did not want to hold Real Estate!
    But with their unwillingness to modify.
    It looks like they want to hold until the market gets better then then get their money back a secound time.
    This is not fair to the tax payers of America.
    When the Banks got the bailout there should have been a requirement to reduce the principal  on these notes.

  • Sue

    I think that the reduction in mortgages is a great idea, but it is not fair to limit it to the FHA /VA loans.  Many people got burned by the mortgage industry when things were being sold in 2005/2006. The banks and mortgage companies got rich on the phony mortgages. Most of that really bad stuff got transferred to us, the citizens of of the USA and now the banks and mortgage companies have gotten way too much money,our money, given by the treasury much without our kowledge and they say that they have repaid it.  I do not believe it but I do not think that the bad mortgages(because they were way overpriced) that we bought should be handed any way different that the FHA/VA mortgages.  Everyone of us were taken for a ride and I hope the banks and lenders are worried,  They should have to repay the mortgage and other money at the same rate they are now charging for their money,  23% and such.  We have gotten burned and it is time for something good to happen to the and for the people.

  • LarryS

    I have said this for last 2 years.  This would stimulate spending, settle home prices and more than likely raise prices.  I dont know how home prices can go any lower.  At a minimum wage you can now buy a nice home.  I have people with $30k $40k and $50 k in cash savings that are buying now. 
     So I pay my mortgage and somebody else gets a principle reduction, I'm ok with that.   More than likely those who are reduced will have to share their equity with the government for a number a years anyway.  That's more than fair…  It's not going to be free!    Wallstreeters dont want this because they stand to lose millions, no billions on the losses that they have factored in and hedged already.  Well shame on them for that risk also.  If the banks didn't get a pkg   They would have lost their shirts their underwear anyway…  and most would not have been able to survive without a few extra million to spend.

  • Tacuff

    Principal reductions are the only legitimate way to correct the housing market.  It will allow owners to free up funds for spending again wihich will in turn flood money back into the economy, which will boost consumer sales, which will create jobs……BUT, the banks that created this mess need to take this one completely on the chin… equity sharing, no more bailouts, no more BS that doesn't work…the time for loan writedowns to current market value is here, wether the Gov does it or if the BK judges are given the authority to do cram downs again on primary residences, it doesn't matter how it happens, it just needs to happen!

  • Jean

    What about those of us who have been paying for our homes, kept up with payments and never refinanced or got in over our heads to begin with? Will our mortgage debt get knocked down some too? Is anybody going to do anything for us?  Is there justice in that?!

  • NParker

    The banks were bailed out they need to bail out the people they gave bad loans.  I was NEVER told about a pick-a-pay clause after three years into my loan.  I would have never accepted that type of loan.  My condo is down $200k.  It will take 25 to 30yrs to come back to the price I paid.  If I “short sale”  I hurt MY credit.  How is this fair? 
    People will be able to spend money to help the economy.  People will also be able to move to jobs.
    YES to principal reductions and NOW!!!

  • LarryS

    I can appreciate those of us not underwater  not taking ay HELOC's   I am for one one of those.  But principle reduction will help us all in the short and long run. 
    Did you have a problem to bail the banks out?
    Why should you hae a problem helping your neighbor?  In fact helping your neighbor helps you also.  They now can afford to sty in their home or if they do go to sell its not in distress.

    If we didn't have a problem with the banks getting their bail out, which by the way was most of our pensions anyway, then you certainly should not have a problem helping out the housing market.  If this was done in the first place we would have been ok by now.  The problem is we waited too long and the banks were in no position to help themselves anymore.  Millions of pensions not dollars pensions [which equated to as I  quote “quadrillions”  This is a number only used in calculating space (astronomy)]   were at stake so the gov too over.  But it was too late to do anything else. 

    I say its a good thing to reduce principle and the gov shares in the equity for a certain period of time like 5-10 years as a percentage.

  • Sprake3

    Yes, principle reduction for everyone under water regardless of individual incomes. All properties need to be appraised and the principle reduced.  This real estate adjustment will lead the way to financial recovery. Eventually the mortgage industry will recover and the tax collector as well.

  • Jer1062

    For the majority this is wrong. I would like to have this as well, but put yourself in the lender's position. You loaned x amount at x rate. The borrower agreed to these terms, in writing. If you were the lender (other bank or private), you expect that return on the money you lent to the borrower.

  • Prfsrbill

    I am concerned about the effects that principal reductions enforced (and coerced) by the Federal Government could have on contract law.  As we all know as investors, the agreements contained within the terms of a contract makes permanent the obligations of one party to the other.  This makes predictable the behaviors of one party to the other, allowing planning and organizing to commence.  Without the enforceable obligations contained within the contract, management of ones business is rendered at best problematic.

    The mortgage (or deed of trust) is a contract by and between the bank and the borrower.  Implicit in the agreements is the obligation to pay down a promissory note which contains the promise to pay a sum certain in money over a stipulated period of time. 

    It would not be much of a stretch to see the demise of the secondary market as we have known it, which allows anyone, not only Fannie and Freddy, to purchase mortgages for cash flow.  How great a discount would be appropriate?  I don't know and neither does anyone.

    Could it also apply to the private second mortgage given as  purchase money paper by a buyer to a seller?  We did this all the time to assist our buyers.  Could it also apply to unsecured paper?  Not much of a stretch here either.

    I side with Jer1062, in that there is a right and wrong at stake here.  This is wrong, pure and simple.

  • Wellnessengineer

    I'm not so sure principal reduction is the way to go…but it sure would be great to take advantage of the low interest rates.  Seems to me that if I can make my payments at 6.875% (eventhough not enough equity), I surely can make it at 4%! 

  • Lhunter787

    The banks don't need any bailout . The people are the ones that.need bailing out from these bad collapse houses mortgages that the banks approve . Who is helping those home owner who can't pay there mortgage and lost there home they are the ones need help