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Rules for modifying loans may ease

Mortgage help

TEXT OF STORY

Kai Ryssdal: One of the ways the Obama administration is trying to resuscitate the housing market is through what are called mortgage modifications -- helping homeowners stay in their homes by reducing their monthly payments. Progress on that, though, has been slow in part because banks and loan servicers, who have to agree to modify those loans, have been holding back.

Now, there is some discussion that the Treasury Department may be tweaking some of the formulas it uses to make those modifications easier. Marketplace's Mitchell Hartman explains.


MITCHELL HARTMAN: When a struggling homeowner calls up to get a break on their monthly mortgage payment, the bank has a few choices, aside from doing nothing. It can reduce the interest rate, extend the life of the loan, or reduce the principal owed.

But banks have been loathe to do this last fix and risk losing out when the market recovers, says Desmond Lachman of the American Enterprise Institute.

DESMOND LACHMAN: If for some reason house prices were to rise in value, if the person who borrowed, their financial circumstances became better, the bank would still have the option of getting paid back the full amount.

Now, there are reports the Obama Administration may tweak one of the financial formulas that lenders use to determine whether to write down the principal, or foreclose.

CATHY OLIVETTI: What they're doing is purely to evaluate, what's a better position for the lender and the investor? Is it better that we let the loan get modified, or do we just need to foreclose? So what in that equation is, we're looking out for the homeowner. They're looking out for the investor.

South Carolina real-estate lawyer Cathy Olivetti is seeing more and more homeowners willing to walk away from their mortgages. That's because they owe so much more than what the property is worth now.

OLIVETTI: We've got to start addressing principal reductions.

A new report from First American CoreLogic finds that people whose homes are worth 25 percent less than what they owe on the mortgage are much more likely to stop paying. One in 10 American homeowners will reach that point by June.

I'm Mitchell Hartman for Marketplace.

About the author

Mitchell Hartman is the senior reporter for Marketplace’s Entrepreneurship Desk and also covers employment.

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