July 12, 2010; Source: Minn Post.com | This article describes a new approach to the threat of foreclosure in the Boston area. A first wave of foreclosures that flowed directly from predatory lending has been followed by a second wave that flows from reductions in income and that requires a different response.

In other words, the loans now in question were within reason when written but are now unreasonable considering reductions in housing values and joblessness. Now the Center for Responsible Lending, a nonprofit group, is predicting that 9 million people will go into foreclosure between 2009 and 2012. One of the responses being promoted is to have the current federal loan modification program encourage bank servicers to write down the principle on loans.

The Home Affordable Modification Program (HAMP) is the administration’s year old loan modification program. It has been used to modify the loans of only 300,000 when approximately 4 million households are eligible. Even when households have been deemed eligible modifications have generally involved extending the term of the loan and reducing interest but not generally reducing principle. This leaves many homeowners still underwater—in a negative equity situation.

HAMP is now in the midst of making some changes. From the article, “HAMP will now incorporate principal reduction into the refinancing process. Servicers will be required to consider the advantages of reducing principal to match the current value of the home. As an incentive, banks that reduce principal on loans will also get a fee based on how much debt was forgiven, and how deeply underwater the modified loan was beforehand.” While this effort is, as one would expect, controversial, there is a precedent in reducing loan principle as we saw during the farm crisis of the 1980’s.

The implementation of this, however depends upon too many factors to assume that much principle will be reduced. The alternative? In Boston, a nonprofit, Boston Community Capital, is buying some properties where owners are underwater and selling them back to owners at a lower price where the mortgage can be afforded. The stipulation is that the owner must share with BCC any profits derived from the eventual selling of the house. BCC has bought 70 such properties in its first year of operating the program.—Ruth McCambridge