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HUD pushes for principal reduction up to 30%

Posted on April 1, 2009 by S-Crow

(I didn’t want this story to get lost in the midst of all the headlines the past few days.)

From the National Mortgage News headlines:

“The Department of Housing and Urban Development is seeking expanded loss mitigation authority allowing the principal amount of an FHA-insured mortgage to be reduced by up to 30% to help homeowners avoid defaults.”

FHA has some poorly performing loans. Many of these loans that are delinquent have a history of defaulting shortly after origination whether it be a refinance or modification.

If the principal reduction takes place what will be some of the “strings” attached, if any? Two questions that immediately come to mind are:

  • Will the borrower have to pay back any principal in a future date or after a sale ?
  • Will the IRS treat the reduction as income?

The program of principal reduction may help keep people in their homes, at least in the short term, and reduce foreclosures. However, I’m opposed to principal reduction, in part, because in my experience a substantial number of people were irresponsible in serial refinancing and overall poor financial planning. On the other hand, principal reduction may save FHA from paying out to lenders for losses that may exceed the amount of the principal reduced to keep borrowers in their home (in foreclosure, HUD may end up taking a larger loss).

Responsible homeowners may be torn about hearing that their neighbor received a principal reduction. How would you react when a neighbor walks by your house while you are working in the yard on a Saturday morning and strikes up an innocent conversation with you about their good fortune of having their FHA loan principal reduced up to 30%? Sure it may have saved a potential foreclosure, but to the core, it has to be frustrating for the homeowner that is working their tail off to make a living and pay their mortgage as scheduled. It may be even more frustrating for a recently unemployed homeowner that is using ‘rainy-day’ savings or selling investments (what is left of it) to pay their mortgage and living expenses.

In other news: In real estate, I have always been an advocate of just watching what people do vs. listening to what they say. Jillayne Schlicke has a perfect example of this in a Forum commentary today (click her links).

S-Crow

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