Can Principal Reduction Help Homeowners?

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Check out this interesting article in Equal Voice, about how the City of Richmond is working to help homeowners with underwater mortgages.  It’s a great read by former Seattle Times report Maureen O’Hagan.  It takes a complex problem and makes it not simple, but at least easier to understand.

You may recall that in September I wrote on my Urban Politics Blog about the Council’s efforts in this area.  To recap:

  • March, 2013 the Council passed Resolution 31434 agreeing to commission a report on the impacts of foreclosures and the lending practices that lead to them
  • April, 2013 hired Professor Robert C. Hockett, a noted Cornell University law professor and resident consultant with the Federal Reserve Bank, to prepare this report
  • September, 2013 Professor Hockett completes his report and presents it to my Housing, Human Services, Health and Culture Committee.  If you like, you can watch the presentation here.
  • End of September to mid-November 2013 The Council has been in the budget process and Committee meetings are suspended for budget deliberations.  We’ve used this time to ask Professor Hockett to make some refinements to his report.

What’s happening on this issue in other places in the nation other than Richmond, CA?  Well, Local Progress, a national network of hundreds of local elected officials that I helped to found is working hard to get communities mobilized and legislative bodies acting.  And here in Seattle, in the next couple weeks, my HHSHC Committee will request the City Attorney, the Budget Office, and & Council Central Staff to study whether the broader strategy of Principal Loan Reduction, recommended by Professor Hockett, makes sense for Seattle, including whether the three specific strategies as recommended in this study would work to prevent vulnerable residents from losing their homes and to assess the financial and legal risks to the City if it chose to pursue the strategy.

What is Principal Reduction you ask?  If your home is currently worth significantly less than you owe on it, principal reduction is a strategy to reduce the amount you owe on your home.  Principal reduction can prevent foreclosures on properties, which may actually be more costly to lenders than a reduced principal owed to them. There are different ways to accomplish principal reduction, some of them untested and controversial (eminent domain is one such way),  but regardless of the tool used to reduce the principal owed on a mortgage, specific requirements are typical, such as the ability to commit to payments.

The bottom line as I see it is that despite the economic recovery, the data shows that locally our negative equity and foreclosure crises are steadily growing worse. My goal in leading the Council review of this report will be to focus on recommendations that address the root cause of the problem rather than temporary fixes. I believe our goals should focus on strategies to target negative equity and find means of keeping people in, or returning to, their homes.