Bernake Calls for Reductions in Mortgage Principal

Outrage of the day. The fed chairman is suggesting that lenders actually lower the principal of mortgages for those having difficulty covering the rising costs of their subprime loans.

Bernanke Calls for More Mortgage Relief
Tuesday March 4, 4:49 pm ET
By Jeannine Aversa, AP Economics Writer
Federal Reserve Chairman Bernanke Says More Needs to Be Done to Prevent Home Foreclosures

One of the suggestions Bernanke made was for mortgage and other financial companies to reduce the amount of the loan to provide relief to a struggling owner. “Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure,” Bernanke said.

Bernanke acknowledged this idea might be a tough sell to lenders. Lenders, he said, are reluctant to write down principal. “They say that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again,” Bernanke said.

Why don’t we just have the subprime borrowers go back to the people or contractors who they bought the house from and demand that they give them cash back since the home price was obviously too damn high? That’s basically what Bernanke is suggesting.

To allow for the subprime market to keep their homes, we’re not talking about a principal reduction of a few hundred dollars, we’re talking thousands or tens of thousands of dollars to provide payments deemed “affordable.”

Bernanke mentions it might be a tough sell since the value of the homes could go down and borrowers would demand another write-down, but the real question is what happens when the value goes up? Do you think when the house is sold the subprime borrowers who got this deal will offer up the difference? No way, it’s just a bonus. Sign me up!

If lenders are forced into this, they should demand that when the house is eventually sold, every penny of value over the starting – or adjusted – principal should go to the lender. No equity gained, period.

Thanks to Malkin and her subprime crisis category for a great graphic.