Bernanke to banks: Get real, reduce loan amounts
This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.
Good morning. Before you tee him up like a Titleist, give the Fed chairman some credit this morning: he acknowledged the elephant in the room, the one no one else in Washington wants to talk about. Bush, Obama, Clinton, Paulson -- none of them has faced the facts on this one.
The elephant is this: aided by incompetent lenders, many hundreds of thousands of recent homebuyers borrowed too much, paid too much for their homes, and can’t possibly pay back the amount they owe. It doesn’t matter if you freeze or reduce the interest rate, or lengthen the mortgage to 40 or 50 years, they can’t pay the money back. If banks really want to stop the foreclosure train, Bernanke said today, it makes sense for them to take a deep breath and to reduce the principal on some of these loans.
The AP: ‘The Federal Reserve chairman, Ben S. Bernanke, called Tuesday for additional action to prevent more distressed homeowners from falling into foreclosure. ... One of the suggestions Mr. 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,’ Mr. Bernanke said.’
This is a tough one, bound to be unpopular. Banks and lenders, who presumably know whether this is a smart course of action, appear to be hoping for the tooth fairy instead -- a bailout that won’t hurt as much as write-downs would.
Write-downs would also infuriate some of the neighbors -- why do the Wilsons get a special break so they only have to pay $350,000 for their house, but we still have to pay $500,000 for an identical house? E-mailer JG writes, ‘This is the most sickening suggestion I’ve ever heard. If I understand him, he is saying ‘Go ahead and buy something you can’t afford and the person who lent you money to buy it should just cut the amount you owe.’ ... Why work hard to achieve anything in this country? The greedy and stupid people will be rewarded, and the hard-working people that save and live within their means will be punished.’
Bernanke knows this kind of backlash is coming: ‘... we want to help borrowers in trouble, but we do not want borrowers who have avoided problems through responsible financial management to feel that they are being unfairly penalized.’
Read the whole speech here and let me know your thoughts. E-mail story tips to peter.viles@latimes.com.
Photo Credit: Bloomberg News.