Big Banks versus Obama, who will win the foreclosure dilemma?
February 17, 2009– President Obama is set to outline the details of his housing foreclosure relief package this Wednesday in Phoenix. He will likely face significant republican opposition to any measures to modify the principal on home mortgages. Proposed measures that could be taken are: 1) to change the law to allow bankruptcy judges to modify the principal owed on a home loan during bankruptcy proceedings, or 2) force the banks to reduce the principal owed to the home’s current fair value and waive past due payments. Although the big bank CEOs claim to be making every effort to help homeowners, very little, if any, are likely willing to actually reduce the amount of the loan or waive payments. Part of this may have to do with huge potential losses that may not yet be recognized on their books.
The mortgage banking accounting rules can be somewhat complex and confusing, but depending upon how the mortgages or mortgage backed securities are classified, they are either accounted for at amortized cost or under a fair value calculation. The fair value calculation is supposed to result in an accurate current value of the mortgages or mortgage back securities held by an institution, with resulting unrealized losses expensed on a regular basis. If they are held to maturity, they can be held at cost, i.e. approximately the original loan amount. Therefore, any mortgages or mortgage back securities classified as held to maturity are held against collateral that, based upon our current market, have dropped in value significantly. If those mortgages eventually go to foreclosure and the collateral is sold, the difference between the loan amount and the sale price will be recognized as a loss. How many potential problem mortgages are being held to maturity with huge unreported losses? A reduction in the principal of the loan and waivers of delinquent payments would result in losses that would be recognized currently, perhaps beyond what has been recognized, even under fair value accounting.
What happens if the banks foreclose on properties, but don’t sell them to avoid taking the losses until the market bounces back? I don’t think we can say we know the full extent of the problem for now.
Some homeowners feel that this would wrongly benefit homeowners who bought at too high a purchase price or got in over their head with adjustable or hybrid mortgages they couldn’t afford. However, there are federal and state laws that have been implemented to protect consumers from predatory lending and deceptive practices. Many lenders relaxed underwriting standards, deceived or manipulated consumers, and pushed what they knew were risky loans in order to grab a larger market share.
A reduction in principal is not necessarily a win-win for the consumer. Unless tax laws are changed, in certain circumstances, the reduction in the loan amount can be classified as “loan forgiveness income.” For example, if a homeowner gets their mortgage reduced from $400,000 at 8% interest to $300,000 at 6% interest, their payment will go down by over $1,100 per month, but they will have to report an additional $100,000 in income for that tax year.
Although we hope our Congress and the President will come up with a solution to the current problem without giving in to any big bank special interest pressure. The simple fact is that homeowners can’t wait for months or years for new legislation to take place. They need to protect their homes immediately. The banks have the legal right to pursue foreclosure and will continue to do so. There are legal steps that homeowners can take to protect themselves, such as loan modifications, forbearance plans, deeds in lieu of foreclosure, short sales, or bankruptcy. A licensed attorney can provide a comprehensive review of your situation and guide you to the right solution.
The Law Office of Barsness & Cohen is a California based law firm providing legal advice and solutions for clients facing foreclosure or other real estate issues. We assist clients in the state of California for a flat fee in obtaining the best possible legal option for foreclosure relief, including loan modifications, short sales, bankruptcy, and other alternatives. We are a Debt Relief Agency as defined by Federal Law. We help people file for relief under the Bankruptcy Code.
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