April 19 (Bloomberg) -- Georgia Attorney General Sam Olens said he has “significant concerns” about a proposal to reduce loan balances for some homeowners as part of a settlement of a nationwide foreclosure probe, joining at least seven other states that have criticized such a plan.
A deal with the top mortgage servicers in the U.S. that includes writedowns could encourage homeowners who are current on their loans to stop making payments, Olens, a Republican, said today in a telephone interview.
“You’re declaring in advance who the winners and losers are,” Olens said. “I’m a little concerned that this process disengages the normal market forces.”
Republican attorneys general in Virginia, Texas, Florida, South Carolina, Oklahoma, Nebraska, and Alabama have signed letters opposing the imposition of writedowns, which proponents call the most effective way to modify a home loan.
State and federal agencies, including the U.S. Justice Department, last month submitted proposed settlement terms to five banks as a starting point for negotiations to set standards for mortgage service and foreclosure. The 50-state effort began last year after homeowners complained of faulty foreclosure practices in the housing collapse.
The state-federal proposal calls in part for monetary payments by banks to go toward a loan-modification program that includes principal reductions.
Supporters of the proposal include attorneys general of Iowa, Connecticut and Illinois, according to representatives in their offices.
“Our position has been that principal reductions are one tool in the toolbox, and should only be used in appropriate circumstances,” Iowa Attorney General Tom Miller, who is leading the investigation for states, said in an e-mailed statement. “We have never advocated broad-based principal reductions that would pick winners and losers or trigger strategic defaults.”
A separate agreement with 14 mortgage servicers announced April 13 by federal regulators was a “big step forward,” though it was “vague” on details that he hopes the attorneys general will clarify, Olens said.
Standard & Poor’s, the New York-based ratings company, said in a Feb. 7 report that trimming mortgage balances is the “most effective” and “least frequent” modification. Fewer than 3 percent of workouts include writedowns.
Borrowers who have loan balances in line with their home values have an incentive to keep paying and a cushion if they lose a job or face other financial setbacks, Cristian deRitis, a director at Moody’s Analytics Inc., said in an interview earlier this month.
Olens today echoed concerns of the other dissenting attorneys general that writedowns could cause additional defaults as homeowners stop making payments so they can qualify for reductions.
“Market forces generally work better than government dictates,” he said.
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