Can we say duh..? We knew ya could!
“In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.” So said Federal Reserve Chairman Ben Bernanke this week in what The Wall Street Journal called “the equivalent of a CEO shorting his own stock.” What does that mean? It means the housing crisis, and resulting banking crisis, may be worse than we thought—much worse.
Bernanke is encouraging banks to consider writing down the principal on millions of mortgage loans as a preferable alternative to reducing interest rates—and the banks have not balked. They know that foreclosures, which net only about 50 cents on the dollar, flood the market and further drive down prices, creating a downward spiral which threatens their institutions.
There are other problems with a trend of write-downs. Primarily, many banks have already begun voluntary workouts with borrowers—more than one million since July—that modify either the loan or the repayment plan in order to help avoid foreclosure. Bernanke’s proposal may cause other borrowers to wait for either their banker to lower their principal for them or for Congress (read: taxpayers) to bail them out. As we have said before, the current mortgage problems are the result of a surge in borrowing created by low interest rates, which artificially drove up prices. Now, with the market flooded with overpriced homes and limited liquidity, prices are subject to their necessary and natural adjustments. Unfortunately, there is no easy or painless fix to the mess.
Source: Patriot Post
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