Former Bank CEO Advocates Mortgage Principal Write Downs

(TheNicheReport) -- Merrill Sherman is a former CEO of Bank Rhode Island who was appointed by a federal judge to mediate a backlog of foreclosure cases in the Ocean State earlier this year. In her report to U.S. District Judge John McConnell, Sherman compared the national mortgage crisis to the "Gordian Knot." According to ancient Greek mythology, the Gordian Knot was such an intricate problem that Alexander the Great decided to solve it with a stroke of his sword. Sherman has been involved in the mediation of hundreds of cases with borrowers as plaintiffs pitted against their mortgage lenders as defendants. Prior to the massive court filings in Rhode Island, the lenders sought foreclosures, which the borrowers claim have been fraudulent or abusive. Judge McConnell appointed Sherman after ordering a stay on the avalanche of cases.

Mortgage Forgiveness as a Solution As a special master to the court,  Sherman issued a report that included his opinion on the American mortgage crisis.  She advocates debt write downs -something that government-sponsored mortgage investors Fannie Mae and Freddie Mac are vehemently opposed to.  Sherman thinks that mortgage modifications that reduce interest rates or extend the term of the loan are hollow solutions that do not address the negative equity status of some many American borrowers. Many of the cases that Sherman is overseeing cannot go forward due to pending loan modifications. Only some of those modification requests will qualify for principal write downs.  Sherman also alluded at what could happen if underwater borrowers would decide, en masse, to give up their legal fight and turned over their homes to Fannie Mae and Freddie Mac. She does not think they would be able to absorb the impact.

Litigation vs. Modification Another problem that Sherman mentioned in her frank report was that Fannie and Freddie are using up million of taxpayer dollars in litigation fees; a practice that could be avoided by principal reductions. The acting director of the Federal Housing Finance Administration, Edward DeMarco, has voiced his strong opposition to principal reductions for Fannie and Freddie borrowers based on what he thinks would be an even stronger blow to taxpayers. The state of Rhode Island leads the New England region in the number of foreclosures.