Realty Check

Big Banks: Principal Forgiveness Will Cost You

Home with foreclosure sign

Clearly the swords are drawn.

Executives from the big banks told the House Financial Services Committee today that mortgage principal forgiveness as a policy is the wrong way to go.

This just two weeks after the Obama Administration announced changes to the Home Affordable Modification Program, requiring lenders to consider principal forgiveness first in the waterfall of options.

I have to say that I'm a bit surprised, as it sounded from all previous PR that the banks were on board with this. And then I hear:

David Lowman, J.P. Morgan Chase:

Broad-based principal reduction could result in decreased access to credit and higher cost to consumers because lenders will price for principal forgiveness risk.

And he cited an industry wide cost of between $700 and $900 billion.

Sanjiv Das, Citi Mortgage:

We caution that applying principal reductions on a broad scale could raise issues of fairness among consumers.

Mike Heid, Wells Fargo:

While very difficult to achieve, the needs and interests of homeowners in financial distress must be balanced with those who've remained current in their mortgage payments.

Das went so far as to say that principal reduction could provide incentive for borrowers current on their mortgages to default, just to get the principal forgiveness, i.e., the bonus in home equity.

How could that be true?

When a borrower applies for a HAMP modification, they have to provide documentation of income, expenses, etc. We've heard so much about how long it takes everyone to get all the paperwork in. Wouldn't this paperwork show that said applicant could afford his/her monthly mortgage payment without the mod and/or principal reduction and would therefore be denied??

And there goes the incentive, right?

Perhaps he means it would just jam up the system with fraudulent applicants, not force more principal forgiveness.

I hope so.

Questions?  Comments?