Friday, February 20, 2009

Loan Servicer Advocates Principal Reduction and Shared Appreciation Mortgages

It's not just academics like me. Take a look at what Wilbur Ross has to say about the housing plan.

"In particular, he believes that what’s needed is aggressive principal modifications for borrowers most in need. He has said that his American Home servicing shop has seen six-month recidivism rates below 20 percent — compared to the 50 or 60 percent standard in the industry — because the servicer has been aggressively looking to cut principal balances...

His own plan looks something like this:
1. The lender takes a write-down in principal, and the servicer takes a similar hit on any servicing strip on the newly-reduced UPB.
2. After principal reduction, the government guarantees half of the remaining principal the lender now holds.
3. This guarantee of half the principal can now be sold into the securitization market, which will give the lender an income stream on the home again and offset some of the losses the owner of the loan has to take when they write down the principal.
4. When the house is sold, if the value of the home has gone up at the point of sale, the homeowner and the lender share in the profits earned on the gain."

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