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David Segal

David Segal

Posted: May 3, 2010 07:09 PM

We Need Principal Reductions Now -- But the New Short Sale Regulations Are Positive Step

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As reported at HuffPost and elsewhere, Obama's Home Affordable Modification Program (HAMP) has met with limited success -- to put it gently. More than 75% of the 170,000 borrowers who've used the program are under-water -- owing more to the banks than their homes are even worth, ever since the housing bubble burst and values crashed -- while last year, lenders foreclosed on 2.8 million homes.

The program surely needs reform, and the push is on to compel banks to offer principal reductions; unsurprisingly, the banks are fighting back, and the Obama administration deserves strong support for its efforts on this front.

In the meantime, and while it hasn't garnered much press, the administration has just instituted new regulations to make life a lot easier on homeowners who are making the difficult decision to sell short: that is, to sell a home for less than the value of the outstanding mortgage, and hand the proceeds over to their bank in hopes of avoiding foreclosure.

Mortgage-backed securities and credit default swaps helped to drive our banking system off a cliff, and to compel the bailouts that have outraged so many Americans.

But so much of what's wrong with the American banking system is far simpler: predatory loans and usurious interest rates, overdraft and ATM fees, crediting payments later than received so the bank can call them 'late' and penalize the card-holder, and a thousand other schemes for squeezing consumers for every last, increasingly precious, nickel and dime.

In this vein, the banks have done next to nothing to make the short-sale process navigable for those demoralized and downtrodden borrowers whose best option is to concede their home to their lender -- frequently a bank which had been gouging them with a predatory loan to begin with.

It's sad, but increasingly evident, that the best decision for many borrowers is simply to get out from under the heavy burden of too-costly mortgages by trying to sell-short. A short-sale won't whack a credit rating nearly as severely as a foreclosure, and holding onto a house by the skin of one's teeth often results in paying more money to the bank in the long run, before an inevitable forfeiture of one's home.

But the short-sale process has been a tortured, tortuous back-and-forth between bank, borrower, and broker, whereby the bank typically won't even tell the homeowner what price it's willing to accept until after the homeowner fumbles blindly into a buyer who is willing to pay it.

For instance, a homeowner who owed $250,000 on her mortgage could scramble to find a new buyer -- say, somebody who'd be willing to pay $180,000. She'd then turn to the bank who held her mortgage to ask if the lender would be willing to accept that sum. The bank would answer yes or no: If no, offering no guidance as to what price might be satisfactory, and if yes, retaining the right to come knocking years later, once the borrower had gotten back on her feet, in search of a payment to cover the $70,000 deficiency.

But now, The Home Affordable Foreclosure Alternatives Program (HAFA), which went into effect on April 5, streamlines the short-sale process for homeowners who've applied for a loan modification with HAMP. Participating banks -- which account for about 90% of mortgages -- will now be compelled to actually let borrowers know how much they're willing to accept ahead of time, will be given incentives to accept short-sales, and won't be able to pursue the deficiency down the road. The program also provides homeowners with $3,000 for help with relocation costs.

It's small comfort to homeowners drowning under the weight of unaffordable mortgages -- and a puny concession from predatory banks that have extracted countless billions from American consumers and taxpayers -- but HAFA serves as a crucial recognition of the tragic realities of today's economy, and will help homeowners exit gracefully, while paying less to the banks than they otherwise might, and salvaging their credit scores. Struggling homeowners need to know about it. And the Obama administration needs our strong support as it pushes banks to do what's really best for their borrowers: offer principal reductions to those whose home values have plummeted because the banking system and housing market collapsed around them.