Thursday, October 25, 2012

Banks Slow to Extend Californians the Agreed-Upon Principal Reductions


     Reports as recent as  August 2012 indicate banks are still slow to extend principal reductions to California homeowners after the $25 Billion Mortgage Settlement was approved by the federal judge on April 5, 2012.  Even though the settlement provisions were effective immediately, the California Reinvestment Coalition (CRC) reported the banks have returned to “business as usual” by forgoing principal reductions to instead push their short sale efforts forward.  Kamala Harris, California Attorney General, had secured $12 billion in principal reductions to homeowners to be used by 2015, yet recent reports from the CRC show a mere 2.7%, or $335 million, as being used for such purposes.  Studies by Keeping Current Matters [aka The KCM Crew] echo these findings, with KCM portraying their research in the below pie chart which shows how the National Mortgage Settlement funds have been spent.


  
     As the chart above indicates, banks are certainly prioritizing their short sale efforts in California in the wake of the Mortgage Settlement, with an estimated 85% of the exercised settlement funds being used for such purposes.  As a realtor Los Angeles specializing in short sales, I’m a little torn by these statistics.  It’s encouraging to see the settlement funds stimulate the short sale arena; after all, these transactions still hold up as a less costly remedy than foreclosure.  At the same time I would also contend principal reductions would go a long way in revitalizing the housing market statewide by opening up more opportunities for refinancing, as well as eliminating more negative equity from the market equation.  Kevin Stein, associate director for CRC, contests “The California piece of the settlement emphasized principal reduction because that is what is needed to stabilize families and neighborhoods in California, and yet the banks’ initial performance shows that meeting Californians’ needs is not their priority.”

    Perhaps the participating lenders / servicers in the Mortgage Settlement can take a page out of life’s playbook and realize that balance is the key component to anything healthy.  Placing too much emphasis on short sales may prove to have less corrective impact than if the funds were more evenly dispersed over all types of assistance programs.  For those underwater homeowners in California interested in principal reduction, it is certainly possible that lenders will begin extending this type of workout more so than in the prior months, since the settlement months are still available for this specific use.  But until lenders begin exercising this workout program at a higher frequency, principal reductions should not be the expectation.  

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