Bernanke Makes a Suggestion
Federal Reserve Chairman Ben Bernanke gave a speech yesterday firmly suggesting that banks give borrowers a generous break. Bernanke suggests a reduction in principal for mortgages that now exceed the value of the homes they cover. The chairman expressed a strong concern that the efforts that the government has made so far have not been enough to remedy the problems of falling home prices and increased delinquency and foreclosure.
Asking banks to forfeit income in order to assist delinquent borrowers seems like a drastic measure. Many banks have already suffered a great deal of losses in foreclosures as well. The thought here probably is that consumers will be losing out on equity in the long run, and won’t profit from selling their homes in the future. The home prices have continued to plummet, and it is hard to predict if and when the reductions in property value will stop.
These are the details of what Bernanke is suggesting be done:
In my view, we could also reduce preventable foreclosures if investors acting in their own self interests were to permit servicers to write down the mortgage liabilities of borrowers by accepting a short payoff in appropriate circumstances. For example, servicers could accept a principal writedown by an amount at least sufficient to allow the borrower to refinance into a new loan from another source. A writedown that is sufficient to make borrowers eligible for a new loan would remove the downside risk to investors of additional writedowns or a re-default. This arrangement might include a feature that allows the original investors to share in any future appreciation, as recently suggested, for example, by the Office of Thrift Supervision. Servicers could also benefit from greater use of short payoffs, as this approach would simplify the calculation of expected losses and eliminate the future costs and risks of retaining the troubled mortgage in the pool.
The basic idea here is that struggling borrowers can benefit from overall lower mortgage amounts through refinancing. He noted that there are some tax-related issues and other legal obstacles that could complicate this process, and that some “mortgage-backed securities may not benefit equally, securitized trusts may not be permitted to acquire new equity warrants, and principal writedowns may require a different accounting treatment than interest rate reductions.”
Bernanke strongly expressed that he feels this action would reduce the rate of foreclosures, and promote economic stability for the entire country.
