Broad legislation stemming from 2010’s “robo signing” foreclosure scandal may lead to the first case of mortgage write-downs since the housing market declined in 2008.
According to a report from Reuters, negotiations between state attorneys general, federal regulators and the nation’s largest banks — Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial – could result in as much as $15 billion to reduce the principal balances and modify some of housing’s most underwater loans.
“I think it will be a step in the right direction,” said Ira Rheingold, executive director of the National Association of Consumer Advocates, in the Reuters piece. “The AGs hope this could work as a pilot program, and show how principal reduction could work.”
It seems the key word in Rheingold’s quote is “step.” The Reuters piece notes that the $15 billion in funds would not touch Freddie Mac and Fannie Mae mortgages, which account for half of the U.S. housing market. Even more, a $15 billion plan, at $50,000 a homeowner, would only reach 300,000 borrowers, a bit shy of the 11 million homeowners currently upside down on their mortgage.
Regardless of its scope, though, the plan could have greater influences on future housing policies.
“Fifteen billion (dollars) is a drop in the bucket, but here might well be the very opportunity to conduct an experiment,” said Ken H. Johnson, a professor at Florida International University’s business school. Two possibilities include greater principal reductions at other banks, and similar programs at Fannie or Freddie.
Thus far, the two GSEs have been resistant to reduction programs, citing the various assets supported by tax-payer firms that would lose value in the event of a write-down.
And there’s also public anger to consider. Three years after the collapse of Lehman Brothers, housing remains a controversial issue among voters, and government officials are hesitant to support homeowners in a fashion that could mirror 2008’s bailouts.
Ultimately, Johnson repeated what he has said earlier, that a write-down would be an experiment – and nobody’s certain of how it will work.
“We’re never been here before so we can’t look to past experience,” said Johnson. “With the added complexity of what foreclosures do to market pricing, some form of principal reduction may be the answer.”