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Economists Call for Principal Reductions to Solve Persistent Housing Market Problems

February 1, 2012

The Corona foreclosure defense lawyers at Howard Law, P.C., have written here several times before about calls for widespread reductions in loan principal for homeowners whose homes are underwater. This solution is strongly opposed by the banking industry and its lobbyists, but economic studies have shown that it's the best, and possibly the only, way to help the housing market recover from its downturn. A Jan. 25 article in the Washington Post reinforced that call, quoting economists from Moody's and other organizations not generally considered political. They say more and more economists believe principal reductions would be most effective, echoing calls fair housing advocates have made for several years. The article contrasted this with the approaches taken by President Obama and the Republicans seeking to replace him, both of whom proposed less drastic solutions.

The president's proposal outlined in the article would allow refinances even for borrowers who are underwater. This would allow them to take advantage of the current very low interest rates, freeing many from the high interest rates they were locked into during the housing bubble. The cost savings to each homeowner is estimated at $3,000 a year, which economists say would allow more consumer spending. Republican presidential candidates are mostly calling on government to avoid interfering with the market, which they say would allow it to "hit bottom" and begin a correction. Some have also called to revoke regulations; former Sen. Rick Santorum called for a tax credit for people who sell at a loss. One expert in the article called this a choice between an Obama plan that won't do much and a Republican plan that would subject individuals to "years and years of grinding your way out."

The economists in the article agreed that neither approach will be sufficient to get the housing market corrected. Rather, they called for widespread forgiveness of principal, because being underwater is a key predictor of whether the homeowner will be forced to default or choose to walk away. Either way, this creates a foreclosure, which causes more problems for the market by creating a backlog of foreclosed homes for sale, pushing prices lower and putting more borrowers underwater. Several studies have concluded that forgiving principal is the fastest way to stop this cycle, but the proposal would be very difficult to get through Congress, as a recent Philadelphia Inquirer article noted. Congress, particularly the Republican-controlled House, has consistently opposed efforts to "cram down" loans, even in limited circumstances such as for Chapter 13 bankruptcy filers.

Led by partner Vincent Howard, our team of Tustin foreclosure defense attorneys continue to be disappointed at the lack of political will to pass this solution, even when it comes paired with concessions to bankers or self-limiting factors such as only being available in bankruptcy. We believe many of the objections raised by the banking industry are red herrings disguising the industry's fear of losing profits, even when those profits come at the expense of individuals and the overall U.S. economy. Indeed, a study by the Cleveland branch of the Federal Reserve Bank found in 2010 that doom-and-gloom predictions made about a cramdown program for family farms in the 1980s had never come true. Fewer than a third of the predicted bankruptcies were filed, and lending interest rates did not increase more than the economy of the time would merit. Vincent Howard and all of our Bellflower foreclosure defense lawyers would prefer to see facts like this used when making decisions now.

If you're struggling to make your mortgage payment and your lender or loan servicer seems to be actively trying to undermine your efforts to get relief, you should call Vincent Howard and the team of foreclosure defense attorneys at Howard Law, P.C. For a consultation, send us an email or call toll-free at 1-800-872-5925.

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