How Long Can Treasury Hold Back On A Program To Cut Mortgage Principal?

underwaterLast week, during our blogger meeting at the Treasury Department, senior officials said that they expected Treasury to implement some sort of program for reducing mortgage principal (the total amount owed) for underwater homeowners (who owe more than their house is currently worth), similar to what Chairman Sheila Bair is looking at over at the Federal Deposit Insurance Corp. Indeed, for months there have been whispers that Treasury may be cooking up some sort of plan along these lines.

However, following the meeting, Treasury quickly clarified to the Huffington Post’s Shahien Nasiripour that it “is not poised to roll out a major principal write-down program.” But if this report in today’s Washington Post is any indication, Treasury might want rethink that:

About 5 million to 7 million properties are potentially eligible for foreclosure but have not yet been repossessed and put up for sale…And the number of pending foreclosures could grow much bigger over the coming year as more distressed borrowers become delinquent and then, if they can’t obtain mortgage relief, wade through the foreclosure process, which often takes more than a year to complete…The borrowers in trouble now are, for the most part, people who have better credit and safer loans and have become delinquent because they’ve lost their jobs or are dealing with other economic setbacks.

As I noted last month, instead of implementing a principal reduction program, Treasury has been hoping that mortgage servicers would voluntarily start cutting principals on their own. Treasury also released a plan last week providing both borrowers and servicers with a tiny financial incentive for moving ahead on short-sales (which involve allowing a homeowner to sell for less than they owe on their mortgage). But these are small tweaks at the margins of a crisis that is, by all accounts, only going to get bigger.

About one in four homeowners in the country is underwater, which amounts to 10.7 million households. And by June, 5.1 million borrowers are projected have home value’s that are below 75 percent of their outstanding mortgage balances, which research suggests is the point when “the owner starts to think hard about walking away, even if he or she has the money to keep paying.”

Plus, only about one-third of the borrowers who have successfully completed the trial version of the administration’s mortgage modification program have been offered permanently lower mortgage payments. This all confirms that the current foreclosure prevention programs simply weren’t designed to deal with a problem of this size and scope.

As Bair said in a speech last week, “we need to recognize the evolving nature of the mortgage problem. The initial phases of the crisis involved poorly structured mortgages that posed an affordability problem. Now we’re dealing with underwater mortgages…We see [principal reductions] as one possible way to encourage borrowers to stick with their mortgages. This could help reduce defaults, keep people in their homes, avoid costly foreclosures, and enhance the value of these loans.” Instead, we seem to be in a permanent state of twiddling at the edges of the foreclosure crisis.