Should banks reduce principal on underwater mortgages? Only if the hero class is rewarded, too ... by gimleteye

In a sign of how perilous the national economy is, The New York Times favors broadly reducing principal on underwater residential mortgages ("Not much relief", July 5, 2009). "Everybody wins" according to the Times by resolving the collateral damage of a speculator-driven economy. Taxpayers win because they will not be required to dole out additional billions when the economy is dragged down further the rabbit hole.

But here is who doesn't win: responsible homeowners who did not buy a bigger mortgage than they could reasonably afford, or, citizens who could have bought but rented or who otherwise remained on the sidelines during the speculative frenzy that turned home mortgages into gambling chips to enhance their standard of living. Why should these heroes be forced to pay?

The New York City residential real estate market is one of the most inflated in the world. That is the result, mainly, of the Wall Street juggernaut built on confections of debt. Now that markets for fraudulent debt has cratered and Wall Street is shriveling, inflated values for condominiums, apartments, and houses are collapsing, too.

The Times' view is that reducing principal will establish a basement for the depression in residential real estate. But the tidal wave of foreclosures has already radically changed market values.

It is principle, not principal, that needs protecting. The buck has to stop somewhere.

As a card-carrying member of the hero class of homeowners, I ask: why should responsible taxpayers who violated no standards of fiduciary responsibility be forced to underwrite those who did? I was a refusenik. I did not buy into the housing market bubble or the culture of greed and speculation that plunged the US economy into the worst economic crisis since the Depression. Why should I pay, again and again and again?

Of course, all US taxpayers are all paying-- hugely-- for miscalculations of risk that passed as sound public policy by elected officials, Democrats and Republicans alike. All those business school degrees in high places didn't add up to a hill of beans. The Alan Greenspans and Robert Rubins of the world have no place in the public realm. But in addition to their banishment on an Isle of Elba or Alcatraz, I have a counter-proposal on behalf of the hero class: if Congress and the Obama administration approves reducing principal for homeowner mortgages that are underwater, then home owners who did not chase the fireflies of unsustainable personal debt or do not benefit from their own TARP should be compensated.

Give the hero class, his or her due: a 30 year income tax holiday equivalent to the average amount of forgiveness of mortgages for the top bracket of income earners, compounded annually. Allow individuals to trade these hero class tax credits to profitable corporations for cash. Why the upper bracket and not the average of home values of reduced principal? Because the upper bracket of wage earners benefited mostly from and contributed to the speculative fever that is now destroying the national treasury.

This suggestion is only half in jest. If you weren't part of the culture of greed and excess that marked the past decade, if you weren't bailed out and haven't been able to get your 100 cents on the dollar like Goldman Sachs, you don't even have a party favor to remind you of what you missed. Welcome aboard.

My keyhole view into the operations of the US Treasury is from a low level of ordinary interest. I don't know how much future national pain could be avoided by reducing principal of underwater mortgages today. Clearly, the New York Times has data that is not being reported. But I do know that reducing some principal on mortgages-- self selected by past mistakes--, when neighbors aren't given the same opportunity to profit, makes a mockery of contracts and is theft by any other name.

The bottom line: speculators who continue to agitate for the next bubble in the US economy need to be wrung from the system. Their bankrupt behavior and preferences wrecked the economy. Tragically, their interests are still represented in Washington more than mine and yours, notwithstanding "change we can believe in".



July 5, 2009
EDITORIAL
Not Much Relief

Four months into the Obama administration’s antiforeclosure effort, the White House’s best guesstimate is that “over 50,000” at-risk loans have been modified so that homeowners can afford their payments and keep their homes. A Treasury official told The Times’s Peter Goodman there is no precise data because a tracking system has yet to be completed. Still, the official predicted that by the end of August, the program would modify 20,000 bad loans a week.

That would be an enormous jump. But even 20,000 weekly modifications, starting two months from now, would most likely be too few.

Unless substantially more relief is forthcoming, Moody’s Economy.com projects that some seven million homes will fall into foreclosure this year and next. Of those, nearly 4.5 million will result in distress sales, prolonging the recession by adding to the downward pull on house prices, home equity and household wealth. And those dire projections may prove too optimistic.

Banks say they are overwhelmed by the clamor for relief and are working hard to meet demand. We have heard that before. In May 2007, a group of banks and loan servicers went to Washington to promise a solution for troubled borrowers. The problem has only gotten worse.

A more plausible explanation is that banks feel no great urgency to act. They are being buoyed by immense government support. And the Obama plan — which provides up to $75 billion in subsidies and incentive payments to help lenders and borrowers come to new loan terms — imposes no real penalty on lenders if the modifications don’t happen.

So instead of moving forcefully on foreclosure relief, the players in the mortgage chain — lenders, servicers and investors — have spent months parsing whether the incentives are adequate. Administration officials have spent countless hours clarifying the rules, trying to iron out the differences and pressing the industry to do more.

The longer it takes, the worse the problem gets. Foreclosures cause price declines and contribute to economic weakness. That causes more foreclosures and other financial problems, making it harder for troubled borrowers to afford even reduced payments.

Last week, President Obama loosened the rules on his mortgage-refinancing program so that borrowers who are current in their payments, but lack home equity, may be able to switch to a loan with a lower interest rate.

The borrowers most in need of help, however, are those who are in imminent danger of foreclosure and who cannot refinance, generally because they owe far more on their loans than their homes are worth. A big drawback of the Obama plan is that it emphasizes lowering monthly payments rather than reducing the loan’s principal.

Reducing principal is a better idea because it restores equity to borrowers, which gives them more of an incentive to keep paying their loans and makes redefault less likely. Banks generally loathe principal reductions, in part because they result in upfront losses, and the administration has not championed the idea.

The president and his aides must be prepared to rethink their position.

Done correctly, a loan modification should benefit everyone. For a troubled borrower, it is a chance to stay in the home. For lenders, it means that they will make more money than they would make from a foreclosure. For taxpayers, the cost of subsidizing the right sort of modifications will be far less than the damage to the economy from millions of more foreclosures.


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