The Issue:
Eleven Million Homeowners are Underwater with their mortgage and growing. The number of foreclosures has increased; high unemployment and the mistrust in our Government have created a public outcry we haven’t seen since the 1960’s. There’s a lot of blame to go around. Depending on which article you read; predatory lenders, misinformed/ uneducated homeowners and greedy politicians are the culprits. Combine this with a billion dollars a month being spent on a war that that has lasted ten years, high gas prices, American jobs going overseas and a do nothing Congress and we have a Tsunami of a tragedy on our hands.

The Problem that keeps growing:
Many homeowners find themselves in an underwater situation but can still pay their mortgage. With no viable option available to them, they have had to make the decision to keep throwing their money into a black hole or strategically walking away from their mortgage. If they pay their mortgage that is in many cases $100.000.00 upside-down and their other living expenses, they find they have nothing left over to spend on good’s and services. Goods and services such as purchasing a new appliance for the home, a vacation for the family or the new roof they need because the current one is failing. Homeowners not having disposable income create a means to an end. Money not spent on goods and services cause employers to lay off workers because of declining demand and revenues. Homeowners still able to pay their mortgage but have no disposable income left can’t keep up the maintenance on their home. This means Heating and Air-conditioning services are not purchased, roofs and other structural problems are not addressed. If the homeowner eventually looses their home to foreclosure; it is in such disrepair, the lender or investor will have to sink large sums of money to make the home sellable again.

Up till now, President Obama and Financial Institutions have been teasing Underwater Homeowners with “Programs” that make it seem like the Federal Government is addressing the Underwater Mortgage Crisis. In reality, programs like “Making Homes Affordable” only help a fraction of the 11 million underwater population. For instance, one of the qualifications to be eligible is you have to be current on your mortgage payments or if your income is too high you don’t qualify. Again, your income maybe such that your able to afford your mortgage but in many cases that’s about all. No one is buying goods and services, employers are laying people off, unemployment continues to be high, banks are not lending and the problem just keeps growing.

The Solution:
The idea of Principal Reductions has been tossed around for a couple of years now. Lenders voluntarily lower the mortgage amount on an Underwater Mortgage to what the actual value of the Home is in 2011 and in some cases, dropping the mortgage by $100,000.00 or more. The idea is that if the Homeowner can afford their mortgage, they won’t default on it. This idea does not sit well with many lending institutions and homeowners that are not in an Underwater Mortgage situation. The feeling amongst this population is why reward someone for a poor financial decision they made in the past. Many say it’s immoral, unjust and unfair. Many also feel that if Principal Reductions are allowed to occur, then other homeowners would purposefully default on their loan to take advantage of a Principal Reduction program. Although these are some just concerns, allowing the Underwater Crisis to continue on its current path will just spell higher unemployment, higher foreclosure rates and larger financial crisis then the great depression. What about the irresponsible lenders that helped get us in this situation in the first place? What did the Federal Government do? They bailed them out! What a hypocracy.

I believe Principal Reductions can be done equitably, morally and strategically so that everyone wins, most importantly the American people. There are some financial Institutions that are already implementing Principal Reduction Programs successfully. One of them is Ocwen Financial Corporation, one of the largest servicers of distressed home mortgages in the country. They began offering more than 3,000 underwater borrowers in a test that began two years ago. The results to date: 79% of the customers offered the program in the test signed up, and the re-default rate has been just 2.6% — far below the 40% to 50% rates within similar time periods seen in some federally sponsored loan modification efforts. Ocwen which services 460,000 loans, has recently acquired a portfolio of 250,000 more. In practice, the plan works like this: Say you’ve been underwater on your loan. You can’t handle the payments and you’re heading down the conveyor belt to near-inevitable default and foreclosure. Now the company servicing your mortgage makes you this multipart offer: First they reduce your loan balance to a level where you will have 5% positive equity in the house. That is, rather than the original amount that has you drowning, they set your debt at 5% below the appraised value of the house. Next the lender modifies the mortgage so your monthly payments reflect the reduced underlying principal balance. Then, in annual increments over the next three years, the lender writes off the amounts of the original debt balance that we reduced. In exchange, we will expect that you do two things: Stay current on your loan payments, and agree to let us share 25% of any future gain you make on the house at resale.

I believe Ocwen’s program is a good start, but I don’t believe Lenders like Citi Mortgage, Wells Fargo and others are going to jump on the Principal Mortgage bandwagon unless there is more of a “shared sacrifice” and “shared gain” on both the Homeowners and lenders part.

Here is what I would propose using Ocwen’s program as a template:
Lender to reduce underwater loan balance to a level where homeowner will have 5% positive equity in the house. That is, rather than the original amount that has them drowning, the lender will set the homeowner’s debt at 5% below the appraised value of the house.
Lender modifies the mortgage so the new monthly payments reflect the reduced underlying principal balance. Then, in annual increments over the next three years, Lender will write off the amounts of the original debt balance that they reduced.

In exchange for the principal reduction, the Lender will expect the homeowner to do the following:
1. Homeowner must agree to remain in home for the next 5 years and not sell it (Giving the housing market a chance to catch up)
2. Stay current on monthly loan payments
3. After 5 years if homeowner sells home they must agree to share 50% or in some cases 75% of any future gain they make on the house at resale. (This is only fair because we must allow the Lender to recoop some of their financial loss).
For Homeowners that were never underwater in the first place, they receive 100% of the profit when they sell their home. This should extinguish the “Moral Hazard” everyone is worried about.

The Homeowner wins, because they now have a mortgage payment they can afford. They also have disposable income they can spend on maintaining their home, buying goods and services and even go on vacation. The continued upside of this is continued job creation caused by the money being pumped back into the economy by the goods and services homeowners are purchasing. This means continued growth and stabilization of the United States and World economies.

The Lender wins, because the risk of foreclosures is reduced, the risk of financial loss is reduced because they share in profits made on homes sold after five years of restructuring the loan. The economy improves, jobs are created and people go back to work, this means new home sales and construction. Lenders win here as they see their profits grow.

The United States and World economies win- because the economy in the United States and around the world improves and the long, painful Financial Crisis cause by the Underwater Mortgage Crisis is over.

Mark
Barnegat New Jersey

While HARP is allowing underwater homeowners to qualify in certain circumstances, without a write down of principle, most underwater homeowners in Florida (over 50% underwater) are still not going to end up getting the HARP Refinance. The other thing that concerns me about the HARP Refinance is that if you are out of a job, or if you are unemployed, you will not qualify for the HARP Refinance Program. And lastly if your mortgage is FHA, USDA or a jumbo mortgage, you are not HARP-eligible.

I am a huge proponent of a Principle Reduction Program that will help homeowners here in Florida get back to even so they can start building equity in their homes again. Being so far underwater, the chances are still good that they will end up in a short sale if they need to move in the next 10 years.