President Barack Obama’s loan modification plan gives servicers all kinds of options for getting a borrower’s debt-to-income ratio down to that 31 percent threshold. They can extend the terms of the loan, lower the interest rate, and even–if they are so inclined–trim the unpaid principal balance of the loan itself. But the administration has been criticized for not mandating that servicers write down the principal balance when they modify a loan, which, some argue, would improve the effectiveness of the program.
“For underwater loans, if you don’t write down the balance to be less than the value of the house, people still have an incentive to default,” Richard Green, the director of the Lusk Center for Real Estate at USC, told me when the details of the plan were unveiled in early March. “Writing down the principal first instead of last—which is what [the Obama administration is] proposing—makes sense to me.”
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You have hit on the key issue in this whole real estate mess.
Unless lenders/investors reduce the principal balances down to current market, there is absolutely no rational incentive to hang on to a property that is under water (loan to value). Especially when you have lost a good paying job and can only find employment at 50% or less of what you previously made.
I was offered a loan mod … but unless they reduce the principal I would be crazy to be paying on a 560K loan with a property value of 400K.
We are still hoping that our government will take our money and helps us . . . before it’s too late!