Who takes the hit on loan principal reduction?

Question

There is a talk about reducing borrower's principal on their loans to help them stave off foreclosure. I would like to know who has to take the hit when a loan is reduced. Most lenders package their loans and sell them to bigger companies, so are these companies who bought the loans in good faith going to have to take the hit?
A lot of loans are sold to investors who acted in good faith. Are they going to get zapped?
Maybe the loans that are going to be reduced will be sold back to the originators. This makes the most sense. Does anyone know the answer to this question?

Don Levy · Answer

Thanks to everyone for your imput. I was afraid that was the answer and I can't say as I would blame the investor who's getting hosed from being very cooperative in being shafted. donrock

Debbie Carbone · Answer

Hi everyone,
With all the upset in the mortgage industry due to the "0"money down loans etc. I thought if a loan was written with less than 20% down the BANK made you pay PMI now isn't PMI insurance in case of default? Who receives the PMI payment Banks or Insurance companies? This PMI payment is any where from $200 -$1000 a month. In my simple mind if we are paying for a bail out then where is the PMI that was collected to cover this default loans. Shouldn't the PMI be putting up some or all of the bail out funds? Just wondering

Jon Holdman · Answer

Not exactly. The PMI company is an insurance company. They receive the PMI payment. If a loan defaults, and has PMI, then the PMI company is making part of the shortgage. The PMI company has some ability to reject any short sale or modification agreement, since they will be the one to make a payout if the short sale or modification is done.

Dave P. · Answer

Don,

Whoever owns the loan is the decision maker for allowing/disallowing a loan mod. Currently, not many investors are too excited about changing the terms of note that they have purchased. Especially if they purchased the notes when they were "performing".

Now, if the gov't subsidizes the loss (or some of the loss, for the investor) you could see the loan mod business soar.

Will Barnard · Answer

Yes, the end investor holding the note is the one also holding the bag. Some investors are simply stopping their losses and accepting the loan mod, while others stop there losses in the foreclosure process. Either way, the investor holding the note (the mortgage) is the one taking the hit.

Don Levy · Answer

David,

Do you mean the last one holding the mortgage? Many loans are originated then sold off to investors. Would they be the ones left holding the bag?
If so, no wonder you made the statement "why principal reduction loan mods are not currently working and will only work if the Gov't foots the bill for the loss"

donrock

Dave P. · Answer

The investor who owns the loan takes a hit. That hit may be subsidized in the future.

Your question gets to the root issue of why principal reduction loan mods are not currently working and will only work if the Gov't foots the bill for the loss.

Who takes the hit on loan principal reduction?

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