The Principal Reduction Solution?

Here’s a two-part question some top short sale agents have been raising –stay with me on this, please. Part one–if loan modification programs from the US Government have failed to make a dent in the foreclosure wave (true), yet the business news media keep running stories like yesterday’s (on NPR) about a “new trend toward principal reductions”, and if all the agents I talk with and hear from have rarely encountered a principal reduction in their collective thousands of transactions–are principal reductions for distressed homeowners a fantasy? Have you ever met anyone who received one?

That’s the first part. Here’s part two. Think big picture. If, in the nation’s most distressed markets, banks made principal reductions widely available (with some proof of ability to pay the new re-set mortgage payment), what would happen? Would there be a rush to principal reduction that would swamp the banks? Would they be able to handle the volume–they can’t handle short sale volume now. Would strategic defaulters just grow in number as more and more people misrepresented their financials to get a principal reduction? Would people prove their ability to pay, only to stop paying again later when they realize home values are not likely to shoot up again in their homeowner lifetime?

Is this making you think principal reduction might not be an answer, any more than loan modification is? Continue imagining. If payment reduction with no real change in principal owed has proven meaningless, and principal reduction doesn’t seem workable–what is the answer?

Are you feeling that “double dip” recession coming on? Some would argue we never left the first “dip.”

Unemployment is stubborn. Consumer confidence is faltering, at best. Home sales have tumbled seriously since the buyer tax incentive ended. Foreclosures are still initiating at near record rates nationally.  The government is wrestling with the politics of taxation in the face of a huge new federal debt.

It feels like our best option may be to get over any ideas of any recovery soon–and, as part of that, let the real estate market be a real market again. No more incentives to buy. Focus on prompting more leading to people who can afford a home. Push short sales for the distressed. Release the foreclosed property holdover inventory faster. What will happen? Home prices in many areas will continue to fall. Other areas will fall only a little or get to a stable level faster than they are now.

The bottom line is: we have to find the bottom of this market, and stop trying to engineer what’s really a false sense of security about home values. Today’s programs are not “bringing stability” to the foreclosure mess in the worst hit parts of America.

We need new thinking. If the Government wants to do something really constructive the new direction might include : 1) Clear out the ineffective “help” programs 2) Fund conversion of foreclosed tracts of homes to affordable housing for sale to the working under-employed 3) Employ some of our massive unemployed in rehabbing this foreclosed housing before it’s made available again. 4) Role model green energy and green materials in the rehabbing of these homes.

Might this me part of a legitimate new direction? Do you disagree? I’d love to hear your views. Everyone in real estate in these distressed markets is wondering out loud, “what is a better path?”

Maybe, it’s just letting go, letting the market work. Some call that strategy “ripping off the band aid.” More thoughts about what doing that might look like–next time.

Ed. Note–Disclaimer: Opinions expressed here are the author’s alone and do not represent the views of any company or legal entity in the real estate industry. All the information on this website is published in good faith and for general information purpose only. We do not make any warranties about the completeness, reliability and accuracy of this information. Any action you take upon the information on our website is strictly at your own risk. and we will not be liable for any losses and damages in connection with the use of our website.

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