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Is it in our best interest to get a prinicple reduction?

January 24, 2010

According to DSNews – Default Servicing In Print and Online our legislators want to see more principle reductions included in the banks’ loss mitigation programs.

State Regulators Say Federal Foreclosure Prevention Program Falls Short

Top officials from across the country warned policymakers in Washington this week that efforts to stem the housing crisis are falling short.

According to a group of state banking regulators and attorneys general, six out of 10 seriously delinquent borrowers are not involved in loss mitigation efforts. Perhaps the most divisive proposal put forth by the group is that government programs should make principal reductions a priority in areas where home prices have plummeted.

I challenge this idea. Dropping the prinicpal amount, reduces the banks balance sheet and further restricts the banks ability to lend money. I am not sure that a tighter money market is really conducive to our economic recovery.

I have a friend that just got his GMAC second reduced to 0% interest for the next 5 years. This 1) reduces the payment amount, 2) leaves the bank’s balance sheet in tact 3) Keeps the bank asset on the “performing assets” side – allowing the bank to lend more vs the “non-performing asset” side where lending is curtailed.

In my experience, my clients just care what their payment is – to our credit and detriment – and keeping the payments low for the next 5 years should be enough to get everyone through this economic storm.

Your thoughts?

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