Stay the Short Sale Course if you can’t afford your mortgage payments

Under the pressure of yet another round of demands from Congress to ease the requirements for mortgage modifications and principal reduction modifications, the “GSEs” or quasi-governmental mortgage clearinghouses for mortgages – FNMA and FDMC (Fannie Mae & Freddie Mac) have rationalized their steadfast refusal to grant principal reduction modifications. http://www.dsnews.com/articles/fhfa-criticized-for-arguments-used-against-principal-reduction-2012-03-15. The rationale for disallowing 100% of principal reduction requests 100% of the time is that: (1) It costs the taxpayers money because FNMA and FDMC are government sponsored enterprises; and (2) approximately 25% or more of the troubled mortgages that might otherwise have some principal forgiven will go back into default anyway. The above-referenced Article does a pretty good job of debunking those arguments. The GSEs have already received massive bailouts from the taxpayers and the losses that taxpayers suffer through the expensive foreclosure process that could be avoided in as many as 75% of defaulting loans through principal reduction are much more drastic than the losses suffered through the principal reductions themselves as proposed.

Beyond the theoretical and onto the practical — If you have analyzed your situation and have decided to short sell your property, STAY THE COURSE! No new programs offered since the beginning of the new year should change your mind if you are a Virginia homeowner! Don’t let the sham hope of a principal reduction distract you from making your property as attractive as possible and continuing to try to sell it. So many loans in this area, especially those originated during the “bubble years” of 2000 to 2008, are regulated by FNMA and FDMC that there is very little realistic hope of a principal reduction.

The enlightened approach would be to study values on a state by state basis or even smaller regional area and determine by odds of default how much money could be saved over demonstrated losses from foreclosure in those areas and, without giving away equity, motivate sellers to continue maintaining and paying reduced payments on “underwater properties” by giving them a reasonable principal reduction. Those reductions could be recovered in part later if the markets experience a strong recovery of value and the borrower attempts to sell the property at a windfall.

But until the GSEs and other major players in the mortgage industry are willing to invest the time, money and brainpower to find a fair formula for our state, count on 99% of all lenders clinging insanely to phantom equity and preferring foreclosure expense and non-productive REO inventories to taking measured principal losses now.

Don’t look for answers to your financial pressure under your mortgage in principal modifications, deeds in lieu of foreclosure, or other ephemeral short cuts in Virginia. Short selling is still the best alternative here.

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