Mortgage Principal Reductions on the horizon?

The WSJ published THIS ARTICLE late yesterday which caught my eye.  Apparently the Obama Administration is working on a plan to force a settlement on the part of lenders who have been guilty of questionable loan servicing practices to write down the principal on mortgages in distressed circumstances.

To this point mortgage relief for troubled homeowners has come in the form of reducing mortgage payments to make the monthly burden more affordable.  However, many homeowner’s are frustrated that even with lower payments they owe much more than their home is worth.

It’s important to emphasize that at this point this proposed program is just that: proposed.  There are a lot of parties involved with the rolling out of a such a program and I wouldn’t be surprised to see the banking industry attempt to hold up the implementation of such a program in court.

Here are a few interesting excerpts:

• “The cost of those writedowns won’t be borne by investors who purchased mortgage-backed securities…”
• “If a unified settlement can be reached, some state attorneys general and federal agencies are pushing for banks to pay more than $20 billion in civil fines or to fund a comparable amount of loan modifications for distressed borrowers…”
• “The settlement terms remain fluid, people familiar with the matter cautioned, and haven’t been presented to banks.”
• “Bank executives say principal cuts don’t necessarily improve payment patterns…”