How the government destroys the incentive to lend mortgages

Beware of government help to create loan modifications. These programs involve mortgage holders agreeing to large write offs. Why would anyone want to make a loan if they face government pressure to write down the principal by a large amount? If there are no loans, what happens to housing prices?

Citigroup is going to be expanded their FDIC Loan Modification Program after pressure from the FDIC. The current Citigroup loan modification program was not doing enough to curb foreclosures and help real homeowners. . . . "They seem to just try to coerce the industry into" the loan-modification program, said David Watts, a strategist at analysis firm CreditSights Inc. They're saying, "We want you to do this program, and we're going to make sure you do it by helping you, possibly with money and possibly with a big fat stick."

Or this from last year:

House Financial Services Committee Chairman Barney Frank is going after the four largest providers of U.S. mortgages to write down second mortgages to prevent "a deepening crisis" in the U.S. housing market.
Frank, in a letter to the chief executives of Citigroup (C.N), Wells Fargo (WFC.N), Bank of America (BAC.N) and JPMorgan Chase (JPM.N) dated March 4, said that taking losses on the second mortgages is necessary in order to allow modifications of the first mortgages to be made, which he said is critical to preventing further home foreclosures.

At issue are so-called second lien mortgages, which theoretically are worth nothing in cases when a home's value is less than the amount owed on the first loan.

But banks that hold the second liens want to be able to collect at least something from the homeowner. And if they do not mark the loan as a loss on their books, the first lien holders are unwilling to negotiate principal write-downs with the homeowners. . . .

And more pressure here has just been announced. Mortgage holders get some money, but they have to bear big write downs.

"We are very definitely trying to facilitate more principal reductions," said Timothy Massad, Treasury's acting assistant secretary for financial stability. "It is a very important piece of the overall solution," he said.

The administration is trying through taxpayer-funded programs to prevent homeowners from losing their homes. Nearly $50 billion has been set aside from the $700 billion bank bailout known as the Troubled Asset Relief Program, or TARP, to help distressed homeowners.

Persistently high unemployment and a weak housing market pose a threat to President Obama's re-election prospects next year.

So far, one of the programs has helped some 670,000 distressed homeowners win lower mortgage payments. But that has done very little to help the overall housing market, which remains depressed even as other parts of the economy have started to recover.

A glut of houses for sale, foreclosures, tight credit and little demand have impeded the housing recovery. Recent data showed that home prices dropped below the low seen in April 2009 during the financial crisis. . . .
One housing counselor expressed frustration with the servicers, saying more people would still be in their homes if their principal was reduced. . . . .



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