Could Fannie Mae and Freddie Mac finally be willing to sign off on principal reduction as a way to keep homeowners out of foreclosure and in their homes?

Edward DeMarco, the acting head of the Federal Housing Finance Agency and de facto leader of the two GSEs has been steadfast in his opposition.

President Obama has made principal reduction priority one. It was one of the highlights of the mortgage settlement and many economists point to it as the way out of this housing mess.

But DeMarco still hasn’t budged, because he says principal reduction will cost the taxpayer money and isn’t good for Fannie and Freddie’s bottom line.

Except maybe it is.

According to NPR and ProPublica, executives at both Fannie Mae and Freddie Mac have concluded that principal reduction would prevent larger losses and in fact, save the two companies money.

Their report claims that in part because of new Obama incentives, which would reimburse lenders half of what they write off, that Fannie and Freddie would benefit from principal reduction

These presentations have yet to be made public, but Democrats are already clamoring to see them. And so am I.

Look I’m not saying that principal reduction comes without risk. Could everyone decide to stop paying their mortgages in order to get a write-down? Sure.

But just because you might get hit by a car doesn’t mean you don’t cross the street. The housing market will NEVER rebound if people keep getting kicked to the curb.

And I don’t care what Edward DeMarco has said, the bottom line shouldn’t be his bottom line. It shouldn’t be about what is cost effective, it should be about what keeps borrowers in their homes. Last time I checked, they are taxpayers too.

And now in the wake of NPR and ProPublica’s investigation, it seems DeMarco has few legs to stand on.

We’ve seen what happens when foreclosure infects a neighborhood. Boarded up homes. More crime. Lower home values. Can you really tell me that the risk of moral contagion is so powerful that you would rather see empty neighborhoods instead?

I remember one Congressman in early 2009 who said “I don’t give a —- about moral contagion. I just care about keeping folks in their homes!”

Nice Thought!

Whether you like it or not principal reduction is finally on the horizon. It is an viable option. It does keep people in their homes. And as I’ve said all along, that’s the end game.

More and more banks will do. Yes they had their hand forced. And so far the sky hasn’t fallen.

And while less Fannie and Freddie loans are seriously delinquent, we can’t have two sets of rules. So if it’s good for the goose (big banks) then it’s good for the gander (Fannie Mae and Freddie Mac)

Now Edward DeMarco told NPR that he is reviewing these proposals to accept principal reduction. He’s come off as the grumpy old troll before, refusing to budge despite what I think is overwhelming evidence in favor of principal reduction.

Maybe, just maybe, he will finally come around. If not, he’ll likely be set packing!

President Barack Obama delivers remarks on the economy at Shaker Heights High School,Shaker Heights, Ohio, Jan. 4, 2012. (Official White House Photo by Chuck Kennedy)

We really haven’t seen President Obama insert himself directly into the housing crisis, but there are rumblings that he may do just that during Tuesday’s State of The Union address.

The fact is that is what homeowners have been clamoring for. A new USA TODAY/Gallup Poll found 58% of Americans want the government to do more to help people keep homes.

According to HousingWire, Ohio senator Sherrod Brown told reporters today that there was evidence that Obama would address the robo-signing case which involves several major banks. A North Carolina congressman even said there were rumours that Obama would announce a settlement, something HUD secretary Shaun Donovan suggested last week was ‘very close’, as we mentioned in our Week In Review on Friday.

For the record, Obama’s press secretary refused to confirm any details, saying only that the President was “focused on the issue of housing”.

Between Dononvan’s comments and the recent white paper sent out by the Federal Reserve, it seems that more and more top government officials are finally realizing how important the housing market is to our economic recovery, not to mention their own political survival.

This is not news to us here at the South Florida Law Blog.

Florida Homeowner Slams Judge Hearing 300 Cases

In the absolutely-not-surprising-in-any-way file, one of the 300 homeowners who went before a Seminole County judge during a three day session this week thinks he was treated flimsily by the court.

Blaize McMonagle told ABC News that Judge Alan Dickey sped through his case without being given the chance to defend himself.

Dickey was quoted in the Orlando Sentinel earlier in the week stating that he was only going to be able to give each defendant about 30 seconds if everyone showed up. With retired judges no longer aiding to help navigate through the foreclosure backlog, we expect to see more and more complaints from homeowners.

Florida’s Hardest Hit Program Not Providing Real Relief

Our skepticism about Florida’s Hardest Hit Program being able to help homeowners in the long-run was confirmed in the Palm Beach Post this week. Sheryl Stuart, a Jupiter homeowner enrolled in the federally-funded program since September said she had doubts she’d ultimately be able to stay in her home once the payments ended because the salary at her new job wouldn’t cover her mortgage.

We believe the program might only delay the inevitable, and only with substantive help like principal reduction will homeowners have a real chance to get back on their feet.

UPDATE: After Stuart was profiled by the Post, she found out her payments, which are set to end in February, are being suspended because she also owns two condos, which are also in foreclosure. She claims the credit counselor who helped her with application for Hardest Hit was aware of this and never informed her of the limit.

Donvovan: ‘Very Close to Robo-Signing Settlement

Stop us if you’ve heard this one before.

HUD Secretary Shaun Donovan came out this week and said a settlement with the big banks over their shady foreclosure practices is near. About one million homeowners would see their principals reduced as a result of the settlement, Donovan said, while others would be directly compensated by the banks.

We’ll believe it when we see it.

Foreclosure Crisis: Will Government Right This Sinking Ship?

Courtesy: Miami Herald

Finally we’d like to end the week by sharing a fresh perspective on the local housing collapse, courtesy of the Miami Herald. Indices from the Federal Housing Finance Agency show that home appreciation levels locally were much higher than the national average when the housing market peaked in 2007.

In both Broward and Miami-Dade counties, home prices were average well over 100 percentage points better than the national average, which was 166 percent 5 years ago. With numbers like that, in retrospect it should have easy for anyone to see that the bubble was about to burst, at least in South Florida.

It’s worth noting that homes locally have held their value better than the average US home. Hopefully that’s a sign of good things to come.

Have a great weekend and we’ll see you next week in the trenches!

From Urban Legend to Reality: Ocwen Offers Serious Principal Reduction

Meaningful principal reduction used to be an urban legend compounded by scamsters.

And until recently, Florida homeowners were probably more likely to spot Bigfoot than find a lender willing to forgive a significant portion of their residential first mortgage through a loan modification. But earlier this month, Ocwen Financial Corp. became one of the first private companies to initiate principal reduction without the prodding of a government agency.

Through the program called Shared Appreciation Modification (SAM), Ocwen is writing down qualified loans to 95% of the underlying property’s market value. The amount written down is forgiven in one-third increments over three years as long as the homeowner remains current. When the house is later sold or refinanced, the borrower will be required to share 25% of the appreciated value with the investor.

“Like all modifications, SAMs help homeowners avoid foreclosure. But they also restore equity,” said Ocwen CEO Ronald Faris. “That’s a significant benefit to the customer and, we believe, the economy and housing market. Psychologically, it’s important too. Our analytics tell us that an underwater mortgage is one-and-a-half to two-times more likely to default than one with at least some positive equity.”

Ocwen said 79% of the borrowers have accepted the offer with a re-default rate of 2.6%. Ocwen said it has regulatory clearance to push the program into 33 states. Since the start of the mortgage crisis, Ocwen has saved over 200,000 homes from foreclosure and produced 25 times as many modifications per loan serviced as the servicing industry overall, the company claims.

“The simplicity and rationale of the SAM is striking: the homeowner maintains the equity that would otherwise be lost in the foreclosure process, and servicers and investors maintain a performing asset,” John Taylor, President and CEO of the National Community Reinvestment Coalition, said. “Ocwen has found a way to align the interests of borrowers, servicers and investors, making the program a win-win for all involved.”

Oppenheim Law hopes this is the beginning of a trend that was supposed to start three years ago when the government promised that it would assist in modifying more than 4 million loans.

Advocates of such a policy argue that it would be cheaper for banks to reduce the principal of a loan to the current value of a house because people who have positive equity in their homes are much less likely to default on their loans. The policy would also help homeowners because they would get to stay in their homes. It seems like a win-win situation, except it isn’t.

As a recent New York Times article illustrates the difficulty with large scale restructuring programs is that banks don’t know who really needs the help and who is trying to take advantage of the situation.

Ms. Rula Giosmas was not one of the people who needed help, yet she got it anyway. For her lender, the modification amounts to an avoidable loss. The lack of knowledge in who can pay and who can’t is the reason why banks are wary of initiating large scale modification programs: not all underwater borrowers will default on their mortgages.

It still remains economically advantageous to foreclose on the defaulters and continue to collect the full loan amounts from the people who can and will pay. The banks also worry that if they do initiate large scale modification programs, it will encourage people who can pay to miss payments simply to qualify for the principal reduction. Such a problem is called moral hazard, where there are incentives to perform badly. The last thing that banks want is to encourage people to default.

Oppenheim Law warns you: don’t bet on a principal reduction. Banks are very wary of them and the Federal Reserve white paper is going to scare them off even further.

There are, however, other foreclosure defense solutions so don’t become a deer in the headlights. You must be proactive!

Check out a recent post about ‘how to pay off second mortgages at a discounted rate’.

WOW: What a week for folks who are looking for ways to bailout their family from the underwater mortgage mess. The tide may be turning.

This third week of March 2010 will long be remembered for when tides started to truly turn for those families with underwater mortgages. First, of course the historic health bill was passed by Congress and signed by the President.

Then, Bank of America announced that they would actually reduce principal up to 30% on some 40,000 underwater mortgages. While the news was encouraging for those who would qualify, it represented less than 1% of all mortgages underwater and seems to be merely a indication for other news to follow. http://www.nytimes.com/2010/03/25/business/25housing.html

Obama Admits Problem, Plan Not Working

But then the Obama Administration today finally announced and acknowledged that their original loan modification program designed to help millions only helped maybe 200,000 people.

Government Plan B

Most importantly, however, the government is unveiling a program that will…we hope… truly encourage banks to begin modifications and refinances with significant principal reduction. http://www.nytimes.com/2010/03/26/business/26housing.html?hp Up until now principal reduction claims on mortgage modifications were made by late night cable TV ads, by national modification scamsters and for the most part became at best urban legend.

As we have discussed on the South Florida Law Blog for more than a year, a government program modeled after the programs during the Depression Era is the most likely way to stem the foreclosure crisis. Here in South Florida, only 15% of all foreclosure properties have hit the streets. Either the banks are holding off on putting the inventory back on the streets (creating a shadow inventory) or the foreclosures have yet to be finalized by the courts. Either way, the continuous flow of distressed properties will not let the market return to anything orderly even if you have on-line foreclosure sales and triple the number of buyers which has happened in some counties, like Miami-Dade County, Florida.

Although the details of the “New” government program will only be released later today, between the Obama Administration’s new short sale initiative going into effect in early April and now a “real” modification program with reduced principal backed by the government guaranties there is no reason why anyone would quit and just walk away.

With the tide turning and waters receding: for those folks who may feel like they are drowning, there is hope and it is on the way. As always, Oppenheim Law is here to help.

Just DO NOT give up. DO NOT despair. DO NOT walk away.

Obviously, we will be discussing all of the latest bailout developments at our free seminar on April 7. We hope you can join us either in person or through our online broadcast via the Oppenheim Law UStream Channel..

What: Short Sales, Deficiency Judgments + More: Free Real Estate Workshop

When: Wednesday, April 7, 2010 – 6:00 to 7:00 PM

Who: Homeowners facing foreclosure, buyers and sellers

Online: The Oppenheim Law UStream Channel

Live: 2500 Weston Road, Suite 404, Weston, FL 33331

Cost: Free with advanced registration

RSVP: To register email roy@oplaw.net or call 954.384.6114

Short sales have emerged as the best option for most South Florida homeowners when it comes to defending foreclosure and avoiding costly deficiency judgments, according to real estate attorney and legal blogger Roy Oppenheim.

Oppenheim joined host Barry Johnson on Real Estate Radio USA to discuss the latest trends in Florida real estate law, foreclosure and homeowner options for fashioning one’s own bailout.

We’ve uploaded the full radio interview at the end of this post, but here’s a quick summary of Oppenheim’s thoughts and advice:

• Government Failure: It has become clear the programs the Obama administration intended to help homeowners have done little more than line the pockets of banks.

• Personal Bailouts: Oppenheim Law has been positing for months that homeowners cannot sit back and wait for government programs to save their homes. Homeowners need to take it upon themselves to fashion their own economic bailout.

• Short Sale Savings: Short sales have surfaced as the best option for avoiding foreclosure, preventing deficiency judgments, and starting homeowners on the path of their own bailout.

• “Principal Reduction”: The attorneys at Oppenheim Law have seen huge “principal reduction” through short sales, with clients walking away from hundreds of thousands of dollars in debt after executing a short sale.

• Expect the Unexpected: When looking toward the future, you need to learn to expect the unexpected in the economic and real estate landscapes. These “Black Swan” events are what will ultimately change the markets.

You can hear the entire Real Estate Radio USA interview with Roy Oppenheim below. We look forward to seeing your feedback and answering questions in the comments.

In case you didn’t hear, the Obama administration announced changes for requirements of paperwork and documents regarding the Making Home Affordable on Thursday, hoping to improve the success rate and communication between homeowners and lenders.

While this bureaucratic decision may indeed help a few more modifications squeeze through the banks clenching hands, ultimately, the change that is needed for South Florida homeowners requires substantial principal reduction on underwater mortgages.

Oppenheim Law has been arguing for over a year that there are too many mortgages valued greater than the actual market worth in South Florida, and merely lowering interest rates and extending the life of loans will not do enough to solve the Florida foreclosure problem.

To read my thoughts on the latest Home Affordable Modification Program changes, check out the entire Miami Herald article, “Home-loan aid altered” in the Oppenheim Law News Room.

From the trenches,

Roy