Could not believe this story. I heard it on the radio yesterday but did not pay much attention to it. I thought that there is no way the head of the Federal Reserve would suggest that lenders magically reduce loan amounts for some people who owe more than what their house is worth. But he did, as reported in the New York Times:
The chairman of the Federal Reserve, Ben S. Bernanke, urged mortgage lenders and investors on Tuesday to reduce the principal on loans for many people whose homes are no longer worth as much as the amount they still have to repay.
Noting that delinquency and foreclosure rates have soared over the last year, and that housing prices have not stopped falling, the Fed chairman warned that efforts by the government and by industry to prevent foreclosures had not gone far enough.
“Although lenders and servicers have scaled up their efforts and adopted a wide variety of loss mitigation techniques, more can, and should, be done,” Mr. Bernanke said in a speech to a conference of community bankers in Florida.
Though the Fed chairman did not explicitly endorse a new government rescue effort, he stepped up public pressure on the industry to take more drastic measures to keep people from walking away from homes when their mortgages exceed the value of their property.
“When the mortgage is ‘underwater,’ a reduction in principal may increase the expected payoff by reducing the risk of default and foreclosure,” Mr. Bernanke said. The Fed chairman warned that a large and growing number of recent home buyers now owe more than the value of their homes and may have no incentive to keep making payments.
Seems that Ben and Henry are quite seeing eye-to-eye on this thing. The NY Times article continues:
(T)he Fed chairman’s remarks were at odds with the position staked out in recent days by Henry M. Paulson Jr., the secretary of the Treasury.
Mr. Paulson, who has pushed the industry to freeze interest rates for at least some subprime borrowers whose low teaser rates are about to expire, drew a clear distinction between helping people who could not keep up with rising monthly payments and helping people who, because of falling house prices, had no equity in their homes.
“While these equity considerations clearly impact homeowners’ financial situation, they are not the primary concern in the effort to prevent avoidable foreclosures,” Mr. Paulson said on Monday.
Not sure how writing off principal solves anything except making the problem worse for the mortgage lenders now. If the principal is reduce on a home and lets say the housing market recovers briskly over the next couple of years, when there is a profit on the sale of that home who gets the profit?
Source:
http://www.nytimes.com/2008/03/04/business/04cnd-fed.html
Text of Speech:
http://www.federalreserve.gov/newsevents/speech/bernanke20080304a.htm
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