• Home
  • News
  • Congress May Urge Mortgage Principal Reductions for Struggling Homeowners

Legislation & Lobbying

Congress May Urge Mortgage Principal Reductions for Struggling Homeowners

Posted May 6, 2008 11:54 AM CDT
By Martha Neil

  • Print
  • Reprints
  • Share

As housing price declines steepen and mortgage default rates rise, Congress is considering legislation to give struggling homeowners an alternative to foreclosure in what many are calling the worst real estate market in a quarter century.

Under a proposal by Rep. Barney Frank, D-Mass, the Federal Housing Administration would be able to guarantee up to $300 billion in refinanced mortgage loans if lenders first agree to reduce the principal balance to accord with current market values, reports Bloomberg. The House of Representatives may begin deliberations on the bill this week, following its approval on May 1 by the House Financial Services Committee, which is chaired by Frank.

As discussed in earlier ABAJournal.com posts, principal writedowns could be in the lenders' interest, since foreclosure likely would be even more costly. However, it can be difficult to obtain approval of principal reductions, since mortgages routinely are resold in large pools of securitized investments and hence permission from multiple parties may be required.

In a speech in New York yesterday, Federal Reserve Chairman Ben Bernanke spoke approvingly of the idea, although he did not expressly endorse Frank's proposal, Bloomberg says. However, the proposed bill is bound to be controversial, since it is intended to rescue only those who are at greatest risk of foreclosure, thus arguably rewarding some who have been irresponsible in handling their finances while offering no relief to other struggling homeowners who have done a better job of budgeting.

"To be effective, such programs must be tightly targeted to borrowers at the highest risk of foreclosure,'' Bernanke warned yesterday, suggesting that participants could be selected based on their debt-to-income ratio or the amount of the gap between what they owe on their mortgage and what the home is worth. "Finding the right balance—particularly the need to avoid programs that give borrowers who can make their payments an incentive to default—is difficult,'' he said.

The worst of the problem is concentrated in five states, according to maps provided by Bernanke. "Price declines have been strikingly concentrated in the three-state region of California, Nevada and Arizona, as well as in Florida and Michigan, and mortgage delinquencies have followed a nearly identical pattern," reports the Los Angeles Times.

Related coverage:

The Age: "Values beat owners in US home slump"

New York Times: "Doubts Raised on Mortgage Agencies as Losses Mount"

ABAJournal.com: "Feds Rev Up National Mortgage Fraud & Securities Probe"

ABAJournal.com: "Consumer Bankruptcies Rise Almost 50%"

Comments

Add a Comment

We welcome your comments, but please adhere to our comment policy. Flag comment for moderator.