Even as the state struggles to get big lenders to sign on, the program has provoked complaints that it's a giveaway to the banks. Critics say property values have fallen so steeply that much troubled mortgage debt is not worth 50 cents on the dollar. Foreclosures on these homes are so costly that the banks will come out ahead financially by writing down loan balances to keep borrowers in the homes, they contend.
"I don't think we should have to be paying the lenders," said Prentiss Cox, a professor at the University of Minnesota Law School Clinic. "We have already paid them in the form of the bailout, and it seems to me what we need is enforced loan modification, because that is in everyone's interest."
Critics also are unhappy that homeowners who refinanced their homes to take cash out of their properties will not be allowed to participate in the program. That will exclude many African American and Latino borrowers in low-income communities who were hustled into loans they did not understand or could not afford, said Yvonne Mariajimenez, deputy director of Neighborhood Legal Services of Los Angeles County.
These borrowers were "enticed by predatory lenders to refinance and pull out equity to pay medical debt, fix their houses and the like," Mariajimenez said. "A disproportionate number were people of color that live in minority communities."
Getting banks to write down principal has proved difficult through government programs, though some lenders have done it through their own proprietary initiatives. The federal government's loan modification program, which is also funded by money from TARP, has always allowed loan servicers to forgive principal on troubled mortgages, but has never required them to do so.
Proponents of forgiving principal say this is a serious flaw. They contend that debt forgiveness is the only workable way to address the problem created by underwater loans.