Fannie & Freddie Resist Demand For Principal Reductions

“In the end, everyone has got to give a little and that includes investors, banks, homeowners and regulators.  We want to keep as many people in their homes as possible, but there isn’t a free lunch. We want to keep losses manageable for the banks, but enforce principles of contract law as well.” -Barbara Novick, vice chairman at BlackRock Inc, the world’s largest money management firm.

Matthew Goldstein, Reuters

What will it take for the U.S. housing market to shake off the gloom?

Even before some of the nation’s biggest mortgage lenders were forced to suspend foreclosure proceedings because of faulty paperwork, it was becoming clear that the Obama administration’s year-old effort to pump life into the housing market was falling short.

The federal government just reported that 4.2 million homeowners are “seriously delinquent” on their mortgages and some 10.9 million borrowers are underwater, meaning their loans exceed the value of their homes.

To make matter worse, there is the threat of protracted litigation between banks and borrowers because lenders might not have followed the letter of law in processing foreclosure paperwork.

An even bigger source of worry is the $426 billion in so-called second liens — home equity loans, second mortgages and other loans “junior” to the primary mortgage — that sit on the balance sheets of Bank of America, JPMorgan Chase, Wells Fargo and Citigroup.

The nation’s four biggest banks report that less than 4.5 percent of these loans are delinquent, according to Weiss Ratings. But some mortgage finance analysts like Joshua Rosner of Graham Fisher & Co remain skeptical. “Are the second liens properly reserved for? The banks say they are but that’s debatable,” said Rosner.

Add it all up and there’s the potential for the U.S. housing market to languish in a stupor for years to come.

As bleak as all that might sound, there could be a way out — one that doesn’t involve another government bailout.

Reuters found that after talking to nearly two-dozen housing experts, mortgage traders, lawyers, securities experts and others, there is broad agreement about what a solution to the mortgage crisis might look like. They say a fix must allow many borrowers to stay in their homes, compensate disgruntled mortgage investors and allow banks to take write down loans without causing a repeat of the financial crisis of 2008.

“In the end, everyone has got to give a little and that includes investors, banks, homeowners and regulators,” said Barbara Novick, vice chairman at BlackRock Inc, the world’s largest money management firm. “We want to keep as many people in their homes as possible, but there isn’t a free lunch. We want to keep losses manageable for the banks, but enforce principles of contract law as well.”

GRAND COMPROMISE

As always, the devil is in the details. And while everyone may talk about the need for all sides to cooperate, there is still wide disagreement about a solution.

The standoff between banks, borrowers and bond investors benefits few. The only ones who stand to gain from such recalcitrance are the bloggers, pundits and polemicists who throw around catcalls like “banksters” to describe Wall Street bankers and “freeloaders” to describe borrowers who have stopped making mortgage payments.

So a grand compromise would seem to make sense.

BlackRock, for instance, is a proponent of giving federal bankruptcy judges the power to take a holistic approach to a borrower’s debt that doesn’t just focus on a homeowner’s mortgage debt as part of a loan modification. So far, the money manager’s so-called mortgage cramdown proposal has not garnered much support on Capitol Hill.

BlackRock, which manages funds that have invested heavily in mortgage-backed securities, maintains that banks should take bigger writedowns on home equity loans, especially if bond investors must assume any losses from a principal writedown on the underlying mortgage.

Read more here: http://www.huffingtonpost.com/2010/10/29/housing-market-america-marshall-plan_n_776171.html?page=1