THE PROBLEM WITH PRINCIPAL "REDUCTION" VS PRINCIPAL "CORRECTION"

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“While Wall Street has us all thinking that this is so complicated that it can never be unraveled, the reverse is true. If the homeowner was the victim of a crime or misfeasance or malfeasance, then the homeowner has every right to restitution and redress of his grievances. If the homeowner was treated fairly and there were no material violations of the Federal and state lending laws, then there is no restitution or redress, because nothing bad happened. Anyone opposed to this plan of action is taking a position against our centuries old system of common law, statutes and procedural due process.” — Neil Garfield

“The problem is that the Courts are looking at policy instead of legal precedent. The pretender lenders are doing everything they can, and doing it successfully, to make sure that the Court never considers or hears the factual question of whether the homeowner was harmed by a wrongful act committed by some or all of the people at the closing of the loan. This isn’t magic or rocket science. If the wrongful act occurred we all know that the law requires the wrongful actor to be punished and the victim is to be made as whole as possible given the reality of the circumstances.” — Neil Garfield

EDITOR’S ANALYSIS: The Washington Post editorial below hits the nail on the head as to the political and legal problems associated with principal REDUCTION. Where does it end? The current plan being discussed is too little, too late and carries political liability equivalent to a third rail. It also is probably not legal.

And THAT is why words make all the difference. Principal REDUCTION stands for the proposition that we are going to arbitrarily pick a number of people and reduce the balances due on the amount demanded, as evidenced by the promissory note. I see nothing but problems in such an approach. The principal problem is that it does not address WHY lowering the obligation from the amount stated on the promissory note is necessary or proper?

On the other hand principal CORRECTION stands for the proposition that the amount demanded is not the right amount and that we are going to correct it to  assure that it matches up with reality. There is no arbitrary or political decision necessary. The only basis for doing it would be that the amount stated on the note is wrong, or was procured by fraud, or some other long-standing legally recognized doctrine of law in which the borrower is the victim who has suffered damages that require redress.

If the Obama administration wants to propose a program of principal correction, it can do so by rule or regulation, just as the Federal Reserve can do in Reg Z. Given the fact that table-funded loans (i.e., all securitized loans for practical purposes) are improper and that the appraisals were false along with other violations of underwriting standards relied upon by homeowners and investors, they only need to state that upon proof of one or more of the violations of the consumer’s rights to disclosure and fairness, the terms of the obligation shall be adjusted to reflect terms of the transaction proposed to the borrower at the time of closing as opposed to the deal claimed by the pretender lender now.

If the mortgage is legally invalid and requires reformation or a substitute to make it valid, then the party seeking protection under the terms of the alleged mortgage must negotiate terms with the homeowner, same as any other case where such things have happened.

As in all other cases where such things have occurred before the latest mortgage foreclosure rampage, these things are self-evident if taken on a case by case basis. In some cases, the property will be foreclosed by a party who is in fact the creditor and has the right to do so. In other cases there will be adjustments to the terms of the obligation which might include a correction of principal (where the appraisal was inflated), interest rate (where the rate was not properly disclosed), term where the “reset” was not properly disclosed etc.

While Wall Street has us all thinking that this is so complicated that it can never be unraveled, the reverse is true. If the homeowner was the victim of a crime or misfeasance or malfeasance, then the homeowner has every right to restitution and redress of his grievances. If the homeowner was treated fairly and there were no material violations of the Federal and state lending laws, then there is no restitution or redress, because nothing bad happened. Anyone opposed to this plan of action is taking a position against our centuries old system of common law, statutes and procedural due process.

The problem is that the Courts are looking at policy instead of legal precedent. The pretender lenders are doing everything they can, and doing it successfully, to make sure that the Court never considers or hears the factual question of whether the homeowner was harmed by a wrongful act committed by some or all of the people at the closing of the loan. This isn’t magic or rocket science. If the wrongful act occurred we all know that the law requires the wrongful actor to be punished and the victim to be made as whole as possible given the reality of the circumstances.

LLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLL

A questionable plan to aid underwater homeowners

THE U.S. ECONOMY can’t truly recover until the housing market revives. Yet recent data indicate that prices, already off an average of 30 percent from their peak in 2006, have still not touched bottom. Lending conditions are tight, and mortgage rates are ticking up again. Nearly a quarter of mortgage borrowers are “underwater,” owing more than their houses are worth. Massive federal assistance – $1 trillion in Federal Reserve mortgage-bond purchases; dramatic expansion of Federal Housing Administration (FHA) loans; an Obama administration push to modify existing home loans – has slowed the collapse but not, apparently, ended it.

What more, if anything, should be done? The latest administration idea is to use the two government-controlled mortgage-finance firms, Fannie Mae and Freddie Mac, to help underwater borrowers. Under the plan, Fannie and Freddie, which back about half of all U.S. home loans, would identify creditworthy borrowers who are underwater but still current on their payments – and then turn their loans over to the FHA, which would refinance them in return for a write-off of at least 10 percent of the unpaid principal balance. Though the administration notes that this is no panacea, officials argue it could make a significant difference to between 500,000 and 1.5 million borrowers, reducing their debt and their risk of eventual foreclosure. Fannie and Freddie would absorb losses from the principal writedown, but proponents of the plan argue that Fannie and Freddie would be even worse off if foreclosures occur later – and the Treasury, which is covering the two entities’ losses, would be on the hook either way.

The entities and their regulator, the Federal Housing Finance Agency (FHFA), are cool to the idea. In addition to the threat to Fannie and Freddie’s already disastrous bottom lines, an obvious drawback is moral hazard: If government starts paying off some people’s debt principal, what’s to stop others from demanding the same break? Preventing moral hazard, of course, limits any plan’s impact. Previous loan-modification efforts also have attempted to target that elusive cohort of distressed-but-capable borrowers, with disappointing results. Analysts at Credit Suisse recently described the potential benefits of the administration plan as “more symbolic and psychological than fundamental.”

Republicans in Congress have started to push back as well. On Monday, the incoming chairman of the House subcommittee that oversees Fannie and Freddie, Rep. Randy Neugebauer (R-Tex.), published a letter to FHFA noting that “the program targets performing loans” and asking “why it would be in the best interest of the U.S. taxpayer for Fannie and Freddie to write down principal on these types of loans.”

Mr. Neugebauer wants a public report detailing the potential costs of the program. More transparency might be a good idea before Fannie and Freddie proceed. Given the mixed results of past loan-modification schemes, a formal public statement of the potential costs and benefits of the latest one doesn’t seem too much to ask.

Tags: Appraisal, fraud, principal correction, principal reduction, term, Washington Post
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