Fed Chairman Asks Banks To Forgive Mortgage Debt

Fed Chairman Ben Bernanke is urging lenders to “forgive portions of mortgage debt held by homeowners at risk of defaulting,” says Bloomberg.

Efforts by both government and private-sector entities to reduce unnecessary foreclosures are helping, but more can, and should, be done,” Bernanke said in a speech to bankers in Orlando, Florida, today. “Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.”

Bernanke’s call goes beyond the stance of the Bush administration and previous Fed comments. By comparison, the central bank’s Feb. 27 report to Congress called for lenders to “pursue prudent loan workouts” through means such as modifying mortgage terms and deferring payments.

The Fed chief highlighted the threat posed by home values falling below mortgage balances, something Treasury Secretary Henry Paulson played down yesterday. Bernanke said the “recent surge” in delinquencies has been “closely linked” to the slide of home equity.

Is Ben trying to put “You Walk Away.com” out of business?

Bernanke Urges Banks to Forgive Portion of Mortgages (Update3) [Bloomberg]
(Matt Stroshane/Bloomberg News)

Comments

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  1. QuirkyRachel says:

    Hey, how about those of us with school loan debt? Can we get in on this, too?

  2. weakdome says:

    I only clicked on this article because I thought he looked like George Carlin. How disapointed am I.

  3. Tux the Penguin says:

    I just love how he’s telling businesses to suffer losses but at the same time doesn’t want the consumer to as well. Even assuming 50% of all subprime loans were fraudulent (which is WAY too high), that means 50% of people are getting a break they don’t deserve.

  4. Saboth says:

    Hmm…so people are irresponsible with their money, buying more house than they can afford, and assuming interest rates would remain forever low, and this guy thinks we should just forgive portions of their debt…while smart people that got into reasonable mortgages have to pay the full loan? Same old same old in America…reward the lazy and ignorant and the burden of making up the difference falls on the few intelligent ones.

  5. unklegwar says:

    Yay! Reward the irresponsible!!!

    But for people like me with AA Credit and a responsible lifestyle, no joy.

    That’s freaking great.

  6. BunsbertMontcroff says:

    @QuirkyRachel: yes, yes, my decision to go to graduate school was even more foolish than homebuyers who signed up for gimmick loans. forgive my debt too!

  7. howie_in_az says:

    Woo, I’m totally not paying my bills anymore because the government will just tell my creditors to forgive my debts!

    Ferrari dealership, HERE I COME!

  8. unklegwar says:

    @Saboth: Amen! To those of us who did the right thing, intelligently, we get the FU.

  9. savvy999 says:

    My tune on this has changed 100%. This is total BS.

    I’m sorry, but mortgage speculators that are losing their bet deserve no forgiveness from anyone.

    Maybe I should just default on my house loan for 6 months, see if my bank will ‘restore some equity’.

  10. keith4298 says:

    @Tux the Penguin: While I agree with you in theory, it doesn’t make much sense to have one side out of a house and in the street while the other side is saddled with a property they can’t unload because there are just too many in foreclosure. Reality trumps theory every time.

  11. drhilarius978 says:

    Eff you, Benny. Some of us responsible people want to buy a home…at fire sale prices.

  12. Murph1908 says:

    Ok, I am torn on this.

    On one hand, the banks are going to lose money if the homes go into foreclosure, so why not lose the money prior to foreclosure, keep people in their houses, and have a chance for payments to continue (instead of having billions of $ in houses on your books you can’t sell).

    On the other hand, banks would be giving away free money to people who got themselves into this. I bought my house in 2004. The value of it has may have gone down. Where’s my free money? Do I get screwed because I was smart enough and responsible enough to get a 30 year fixed that I could afford?

    Now, IANAE, so I may have to put my trust in people supposedly skilled and educated in such things.

  13. krose says:

    @QuirkyRachel:

    Seriously! I would be able to stimulate the economy a lot more if I didn’t have a ton of student loans to pay.

  14. bonzombiekitty says:

    @Saboth: In principle I agree with you. However principle does not always go hand in hand with practicality. Had it been a small number of people, and had little effect on wider markets, I’d be 100% against this idea. However, we’re all being affected by the mortgage problem, so the question is are we better off as a whole with a plan like this or not? Not being an economist, I don’t know the answer to that question.

  15. overbysara says:

    so do I get to buy a house that I can’t afford and then ask for forgiveness of the debt?

    what a sham.

  16. Asvetic says:

    Bernanke is in complete denial. Will someone tell him we’re in a recession already.

  17. cmdr.sass says:

    I’d rather see families out on the street. In the long run, it will be cheaper to donate to the homeless shelters and food pantries. In the meantime, maybe someone, somewhere will learn a valuable lesson about personal responsibility.

  18. Asvetic says:

    Also, might I propose a tax on ignorance and stupidity? It might be our only way out of this recession.

  19. novelgirl says:

    @Murph1908: Also, if these homes are foreclosed it hurts other homeowners and local government because that’s property the local municipality is getting tax revenue from and having vacant homes would hurt surrounding property values.

    I feel like it’s a murky situation. That said, I know I couldn’t afford a house/ condo so I haven’t bought one.

  20. novelgirl says:

    @novelgirl: Ack, is NOT getting tax revenue from.

  21. dualityshift says:

    This solution isn’t perfect, but it will do.

    As for us who ARE responsible, we should be rewarded by way of tax credit, or mortgage rebate. Not saying this is perfect, but if the banks paid one month of your responsible mortgage, as a sign of appreciation for your great business, would you be happy?

    If this solution works for you, write your congressman.

  22. betatron says:

    Gosh…

    I have to actually earn money, manage my expenses and spend _less_ than i earn to afford to be able to pay down *my* principle, on a loan that i made sure i could afford.

    WHERE’S **MY** ***PONY***?????!?!?!?!?!

    .max

  23. bonzombiekitty says:

    The best course of action to mitigate the negative effects of the mortgage problem might actually be some debt forgiveness (again, I don’t know if that’s the case). That mitigation might be rewarding those who made poor choices, but you just implement rules to keep the situation from happening again.

    Saying “you made your bed, now lie in it” sounds nice in principle, it really does. But when you lying in your poorly made bed makes 100 other people have a very tough time sleeping in their beds, then something needs to be done.

  24. Jaysyn was banned for: http://consumerist.com/5032912/the-subprime-meltdown-will-be-nothing-compared-to-the-prime-meltdown#c7042646 says:

    This guy is supposed to be our head economist?

    We. Are. Fucked.

  25. SkokieGuy says:

    I too am torn, because if foreclosures proceed, which are justified for fraudulent loans, then we all suffer, because the costs are higher, attorney’s fees, court costs (our tax dollars pay those judges salaries). Apartment rents will rise, credit card rates increase to cover the losses due to bankruptcy, etc.

    While I don’t want to reward those who made foolish decisions, I also don’t want the value of my home to decline by adding more unsold homes to the current inventory

    Instead of a pricipal reduction, what about the banks issuing new 30 year loans with a balloon payment at the 30th year (instead of the common 5, 7 or 10 year)?

    This allows the bank to retain the full loan value, reduces the mortagee’s payment into a more affordable range, and presumably, the value of the home will increase enough over 30 years to allow the bank to recoup the equity at sale or refinance.

    Perhaps restrictions would apply to limit the borrower’s ability to obtain equity loans, to only the equity available after the balloon payment is deducted.

    Those who did commit outright fraud (as opposed to those who just made bad decisions) should be prosecuted, which should always be the cause.

    Does this make any sense to anyone?

  26. johnva says:

    @novelgirl: “Property values” are, for the most part, only a function of supply and demand. In other words, most of the “value” of real estate is not derived directly from the cost of the materials and labor that goes into building a home. If the demand isn’t there to meet the supply, the value has already dropped. Nothing we do to prop up the market is going to really “fix” that problem. The proper fix is simply that homeowners lose equity. Period.

  27. brianala says:

    @Jaysyn: My thoughts exactly.

  28. johnva says:

    @dualityshift: Maybe they could force the banks to forgive some portion of debt on ALL their customers, not just the ones in trouble, if they are going to forgive any. That would make it so that they aren’t rewarding bad decisions. But I don’t know if that’s actually financially feasible.

  29. dualityshift says:

    @bonzombiekitty: But when you lying in your poorly made bed makes 100 other people have a very tough time sleeping in their beds, then something needs to be done.

    So, I have to be considerate of total strangers when getting my mortgage?

    Those who say these people are scamming us all, think on that for a moment…

    Do you think:
    1. These people are smarter than everyone else?
    2. These people knew the government would not let them lose their houses?
    3. This process will continue?

    No one could have seen what the government is going to do to ‘fix’ this problem. Anyone with that much forethought would have bought up as many houses as they could. I know I would have.

    Letting these people foreclose, though not a great idea, is better than bailing them out. If the consequence of their actions is to get bailed out, what is the lesson learned?

    I personally believe that anyone who has defaulted on their mortgage should be turfed out. Those scraping by, trying to do the right thing, (pay their monthly mortgage payment) should be the first ones helped out. Remember, not everyone stuck in this deal got in to defraud anyone (reward those who are honestly trying to keep up). In some cases, the mortgage holders are the ones who acted fraudulently.

  30. dualityshift says:

    @johnva: Considering the US Treasury allows a 7 to 1 debt ratio for lending firms, I can’t see it being too difficult.

  31. RobinB says:

    I work for a small bank and can see a time where no one will be able to obtain a mortgage. Banks aren’t going to keep making new purchase money avaiable if they can’t count on getting all of it back in a specified, timely manner.

  32. moore850 says:

    @unklegwar: The part they are implying here is that forgiving the debt really isn’t going to stop some people from having bad spending habits, so you’re still better off with a great credit rating in the long run. If you’re the type of person who would spend your tax rebate on a sports team-branded grill, for example, while 2 months late on a house payment, then this fix would probably apply to you (although it won’t teach you how not to spend irrationally).

  33. bonzombiekitty says:

    @dualityshift: No, I’m not saying that. I was trying to illustrate the point that all the people who got mortgages they could not afford is having a negative effect on everyone else. The “laying in the bed you made” is just letting all the people with mortgages they cannot afford lose their houses, and the “making 100 other people have a tough time sleeping in theirs” is the wider economic effects of all those people losing their houses.

  34. lightaugust says:

    Everytime there’s an article on this, Consumerist boards seem to have the same old debate- forgiveness v. personal responsibility. So if some sort of debt relief/ bailout isn’t the answer, and I ask this in all sincerity, what is, then?

    I mean, it’s great to chastise, but if this administration is proposing a bailout/ debt forgiveness, then my sense is there aren’t a whole lot of other options.

  35. crabbyman6 says:

    @Asvetic: That tax is called the lottery.

  36. Shaggy says:

    @cmdr.sass: Spoken by someone who’s never been homeless.

  37. laserjobs says:

    Why doesn’t the Fed collect everyone’s paychecks and manage the money for everyone? You could have a house and a weekly delivery of ramen.

  38. Caswell says:

    @Saboth:

    Amen. I had the displeasure of relocating during the peak of the housing bubble. My wife and I went into a traditional loan that we can afford and made a significant down payment – much of that down payment has been wiped away by the collapse of the market, where are the bleeding hearts weeping for folks like me?

  39. B says:

    @lightaugust: A bailout will help people who have homes at the expense of people who are looking to buy a home, by keeping housing prices artificially inflated. Not doing anything will hurt homeowners by decreasing home prices, and by foreclosing on lots of people. But this will allow new people to buy houses, and people who were foreclosed on can always buy a cheaper, smaller house afterwards. So the question is who do you want to help and who do you want to hurt? Personally, i think we should enact regulation to prevent mortgage brokers from lending people more money than they can afford, and get rid of balloon/option ARM/Interest only loans that have enabled this kind of problem from happening again and let the housing market collapse. Of course, I say that as a non-homeowner, so I’m biased.

  40. Snowblind says:

    @RobinB:
    You are so right, changing the rules mid stream is a bad idea.
    Banks and lenders will not take risks if the government changes the rules on them in a way that they lose money.

    That is an additional risk, and investors respond to risk by expecting more return.

    @moore850:

    Yep, if you give people with debt a million dollars… they will be in debt again in no time.

  41. theblackdog says:

    Yay, now people can go back to nagging me to buy a house even though I know I can’t afford one now. I can just fall a little behind and get the govt. to bail me out!

    Personal irresponsibility FTW!

  42. savvy999 says:

    @johnva: you’ve got it exactly right.

    Short of imposing some sort of moratorium on new housing starts (which ain’t ever gonna happen), any effort to prop up property values is bound to fail. Period.

    The real and effective plan should be for homeowners to refi ARMs at reasonable rates so that they can afford to make payments on the houses they currently live in. That’s the only workable and equitable solution.

    The fact that some of those houses may have dropped in value is unmanageable by any government action. It’s Econ 101, supply v demand, there’s too many damn houses out there.

    When a person in an underwater-house sells for a loss, they’ll be liable for the remainder of the loan, +/or face civil action by the lender. Or, stay in it for 10, 15, 20 years until it regains its value.

    Bottom line, there’s no need (or workable way) for the government or even financial sector to bail out property values.

  43. mattmill says:

    5 years ago we were offered “creative financing” for our mortgage due to the fact that I was unemployed at the time having just moved across the country. My wife had a good job and mine was just trying to find something in my field. It happened 9 weeks after moving. Because of this we decided to not buy our first choice house and buy one that was 30K less (159K vs 192K) so we could make payments and not have to worry if I was longer to find a job.

    I don’t know who I am more upset at, the lenders trying to make a buck or the borrowers that were not thinking???

    I don’t get it. There has to be some way to protect the rest of us that are responsible home owners. My town is going to be hit harder than many due to a military base closure in 2011. Town of 22,000 includes close to 9,000 military family members that will all be leaving the area by 2010, which will leave a lot of housing on the market.

    matt

  44. quattie says:

    @dualityshift: Letting these people foreclose, though not a great idea, is better than bailing them out. If the consequence of their actions is to get bailed out, what is the lesson learned?

    While I agree that there are consequences to be learned, letting all these people foreclose will end up hurting smart, responsible people in the long run. Supply and demand is very clear, and the more foreclosed houses in your neighborhood, the lower you house value goes.

    If you took a 30-year fixed, and you actually planned to stay in your house for more than 10 years, then sure, this does not affect you. The market will eventually shift, your house will start appreciating, and you will be fine. But for people like me, recently married, who had to buy a house in the hype of the marked, now I owe more than my house is actually worth (and I live in So. Florida, where its way worse than the nation’s average). Should I have kids anytime soon, I would either have to take the hit and move to a bigger house, or ride it out in our small condo until we can sell.

    It is a tough situation, and the argument between forgiveness and social responsibility will forever go on, but a solution (even not a perfect one), have to be reached, fast.

  45. FLConsumer says:

    Alan Greenspan — we need you back!

    Bernanke’s obviously out of control and does not understand Finance / Economics 101.

    I don’t know that the USA can survive 2 more years of Bernanke.

  46. Mojosan says:

    This is BS.

    I am sick and tired of being punished for living wihin my means, living responsibly, and planning for my and my family’s future.

    Why do I have to sacrifice to pay for other people who refuse to accept personal responsibility?

    If you can’t afford a house, don’t buy a house. If you can’t afford children, don’t have children. Stop pointing at me and shreiking “It’z N0t The Fair!!!”

    The taxpayers and honest shareholdrs of these companies are being robbed. It’s a disgrace.

  47. FilthyHarry says:

    I think the homeowners do bear some responsibility but you cannot ignore the fact that the banks behaved in a predatory fashion, basically using the approach, lets offer these risky bad loans to everyone we can, try our hardest to convince them they are good loans, and take every sucker we can. So on balance I’d say the banks bear more of the responsibility, but more than them, the politicians who relaxed the rules for their own benefit, bear the most.

    That aside I do want to point that asking these banks to forgive this debt seems to be a very anti-free market thing to do coming from such a conservative administration.

  48. bukz68 says:

    Natural selection. The only way you’re going to get good consumers is if you force the bad ones to live with their mistakes.

  49. johnva says:

    @B: I think your post is a good summary. The way the decision about who we want to help should be made is by looking at what the economically optimal solution is. You don’t want to create a distorting economic influence via your bailout plan, because that screws up the whole process by which homes get priced and will lead to worse problems down the road. So what we really want is to do something that will lead to a restoration of economic balance and efficiency as soon as possible. Since the chief economic imbalance seems to be that homes are way overppriced, the only reasonable solution I can see is that homeowners should be the ones who take the hit. That’s just what happens sometimes when you invest money – you lose a lot sometimes.

    The real reform I would like to see would be some safeguards to prevent people from placing ALL their personal financial resources into their home investment. People would think it’s crazy, high-risk behavior to invest all your money into a single stock. We need to somehow get people to understand that investing in a house is similar and that they really should live within their means and not go “all in” in order to slightly upgrade their lifestyle. I think the fundamental breakdown is that people were not properly understanding/mitigating against the substantial risk they were taking by buying a home.

  50. laserjobs says:

    If the banks can afford to take the loss now, this is probably the best solution to minimize the losses. For this to work, it has o be done as fast as possbile as home prices will continue to fall and the loan should be converted into a recourse loan. This would stop the hemoraging of walk aways and leave bankruptcy as the only option out.

  51. davere says:

    Maybe I should skip a couple mortgage payments so that I’m included in this deal. How nice.

  52. dualityshift says:

    @B: Hurt those who default should be left in the cold. Those who make that payment each month, no matter how hard it is out there should be helped first.

  53. SirKeats says:

    on the one hand, this blows for those of us who were responsible about our mortgage. on the other hand, this might help to lessen the drop in home prices that would lead those of us who were responsible into owning homes that are now worth less than what we paid.

    that said, couldn’t the banks do something where they “forgive” part of the loan with the stipulation that upon sale, any equity gained up to the total original loan value is paid to the bank.

    it’s not a perfect solution, but maybe an idea to help lessen the kick in the nutz those of us who actually THOUGHT about our mortgages before jumping head into something we couldn’t handle.

  54. clickertrainer says:

    So now the US housing market is most like a third-world country, where we take out loans that must be forgiven in order to restore world peace. Shame on all of us. We all let it happen — especially those of us who heard about those crazy loans and just laughed, instead of speaking out. I’m guilty.

  55. Orv says:

    Before we condemn the people who bought these houses, let’s not forget that the banks were speculating just as much as the homeowners were. They were getting inflated appraisals (ala Washington Mutual) on the theory that housing prices would continue to go up. They also “knew” they could resell the loan before the rate adjusted, so the homeowner’s ability to pay was really none of their concern. The incentives were all wrong, which kept the market from correcting itself.

  56. Orv says:

    @johnva: We need to somehow get people to understand that investing in a house is similar and that they really should live within their means and not go “all in” in order to slightly upgrade their lifestyle.

    I agree that this is a big problem, but it’s largely social. There’s a lot of social pressure to buy a home. It’s part of the “American dream,” with the implication that you’re not really a successful adult until you stop renting and buy a place. Owning a paid-off home is also the only way many people can afford somewhere to live in retirement. And of course the mortgage interest deduction is a strong incentive to get a mortgage instead of pouring money into rent payments.

  57. JoeWoah says:

    @SkokieGuy:

    Makes sense to me. I’d also like to see restrictions on paying more and ahead of schedule removed (yes, they have those).

    Those who have ballooning interest rates that are 17% and over (yup, there are home loans with interest rates that high)should have those lowered to a fairer 3X multiplier over what prime is now. 9% interest if a lot, and more than fair, 17% is just stupid. What’s the point, eventually the consumer won’t be able to pay it and you’ll have to foreclose causing everyone more money, including the bank.

  58. BrianH says:

    Forgive debt?!?!?!?

    Let’s call it what it is — rewarding greed and stupidity.

    If I was an investor holding those mortgages (let’s face it, we all are — directly or indirectly) – I’d take a flamethrower to advocates of government interference in the market.

    Otherwise it’s “heads I win, tails you lose.”

    If you’re reading this & you are a responsible home owner & mortgage payer, you should be livid.

  59. mknoll1 says:

    @johnva

    I think you are incorrect in asserting that supply and demand are the only determinants of house prices. I think that just like a car the 4 square approach has a huge impact on home prices. The 4 square takes into account the value of your trade (old home), down payment, interest, and price. This single biggest factor in recent years causing the run up in house prices has been the decrease in interest rates and increased flexibility in lending. Both of these make houses more affordable to more people. You can’t really argue that this reflects an increase in supply or demand only a decrease in the relative cost. NOONE buys a house cash. Because of that most homeowners could not care less if their mortgage was 200k or 500k as long as the monthly payment stays the same.

  60. The government should offer some sort of debt forgiveness or bailout on the condition that anyone who takes the offer needs to house a currently homeless family for the duration of the mortgage.

    Two birds, one stone.

  61. matto says:

    all I have to say is What. The. Fuck.

  62. Orv says:

    @BrianH: If you’re an investor holding one of these mortages, you have to ask yourself, do you want to be stuck trying to have a fire sale on a house that has lost value? Or would you rather continue to accept payments on a lower principle? I understand the “moral hazard” argument you’re making, but investors have to look at this from a business loss perspective.

  63. Also, as someone who earns a decent living but not enough to buy a house because he likes to pay his bills on time, I say: bring on the fire sale.

  64. disavow says:

    For a free-market capitalist, Bernanke sure seems to favor government intervention.

  65. GearheadGeek says:

    It seems to me that a more even-handed approach that might even be less expensive for mortgage companies would be to forgive the crazy rate adjustments rather than forgiving actual debt.

    Smoothing out the rate spikes would allow people who bought their home as a place to live to accept a bit of negative equity and continue to pay their mortgage and keep a roof over their heads, if not get manna from government heaven in the form of forgiveness of a debt they voluntarily took on.

    Note that I said “smoothing out the rate spikes” rather than fixing the rates at the initial teaser levels… that wouldn’t be fair to people who were responsible in their own mortgage choices, and would be a losing proposition for banks. Some people wouldn’t be able to afford the payments even at a fair, current rate… those people can’t afford their house, plain and simple. Some people are “flippers” and wouldn’t want to accept the negative equity because they bought the house for $0 down and may be under water with the cost of the remodeling… they might give up the houses.

    This would get people who bought homes for the right reason (even if they made some bad loan choices along the way) a chance to keep their home and recover from this big bump, without offering too much assistance to speculators or throwing 100% of the cost on mortgage companies that might choose bankruptcy over dealing with the consequences of their recent business model.

  66. cmdr.sass says:

    @Shaggy: You would be wrong about that my friend.

  67. FilthyHarry says:

    @disavow: Because despite their convictions, he knows the repubs will take a bath if this gets hung around their neck. (As it should)
    Some are always willing to trade values for political expediency.

  68. Squeezer99 says:

    even though i’m not having any problems with my home loan, can i get some debt forgiveness too?

  69. johnva says:

    @Orv: Yeah, there is social pressure to buy a home. I think this is connected to the yawning gulf between the rich and everyone else that is opening up in this country. Lots of these people bought homes they couldn’t afford BECAUSE homes have gotten so expensive that even entry-level homes are unaffordable to a lot of people (especially young people, who have record levels of student loan debt that earlier generations didn’t have to deal with). So we aren’t really helping those people by propping up the housing market; in fact, we’re hurting them by keeping homes unaffordable. We need some reforms to restore a measure of economic equality of opportunity, too (working on that student loan/cost of education problem would be a good place to start, in my opinion).

  70. timsgm1418 says:

    also, if all those homes end up empty, isn’t that also a boon for the flippers? Which will paint and shine up to make a huge profit again? I do agree if all those homes go in default, we will all suffer. I don’t think they should forgive the debt. A long time ago whoever it was that I had a car loan with would add the payment to the end of the loan for a small fee, so that made my payments up to date but really gave me a 2 month grace without paying. I knew I was going to pay the car off well before the end of the loan, so it was worth it to me. Why couldn’t they do something like that with the homeowners. Refinance at a slightly lower rate, move the past due to the end of the loans (not many people live in a house til it’s paid off) and require them to take a money management class for this service. The bank won’t lose any money in the long run, and the homeowners will keep their homes. Definitely would be better than foreclosing on the homes @SkokieGuy:

  71. modenastradale says:

    @FLConsumer: Are you kidding? Alan Greenspan’s credit free-for-all is largely what helped to spawn this mess.

  72. SadSam says:

    I understood the premise when Bernake and Paul were suggesting that banks and mortgage companies lcok in current interest rates for those folks with exotic loans that are coming due. People who have these mortgage who can currently afford the mortgage payment would continue to be able to afford the mortgage payment.

    Now, if I understand this correctly, Bernake is saying that if John Smith bought a house for $200,000 (let’s assume he did not put 20% down) in 2006 and the house is now worth $150,000 and Mr. Smith is upsdie down on the house the bank should change the terms of the mortgage such that Mr. Smith is no longer paying on a $200,000 mortgage but is paying on a $150,000 mortgage and he basically got a $50,000 gift from the bank.

    What’s the point of this? I’d assume that the monthly payment would go down so that would help Mr. Smith or if Mr. Smith was trying to sell his house he could sell it for $160,000 instead of trying to sell it for $210,000 (does he owe anything back to the bank under this plan). And while I understand the universal implications of trying to keep people in their homes, I sure would like a $50,000 gift from my bank.

  73. johnva says:

    @mknoll1: I didn’t say supply and demand were the ONLY determinants of value. Of course there is also intrinsic value to having a roof over your head, a piece of land, the materials your house is built from, etc.

    Also, what you’re talking about is still supply and demand…it’s just money supply instead of housing supply. Money supply is one of the main determinants of real estate prices (and higher education prices, and car prices, and…). The availability of cheap loans, like you said, will increase demand for housing and thus will cause inflation in home prices. Now home prices are falling dramatically largely because the cheap money supply has dried up. Basically what you’re saying is that people shop for houses “on the payments”, and for the most part, you’re right. The problem is that people who do that are failing to account for the huge risk they are taking by doing that. They might be able to afford the payment on their overpriced house still if their loan is at a cheap fixed interest rate, but by buying that more expensive home they are taking a bigger risk of a downside if the value falls say 10% or more. They may end up underwater on their loan and unable to sell for what the market is supporting if they don’t have the external financial resources to make up the shortfall. That’s a bad thing, and it’s what we’re seeing now. You can’t just “fix” the problem of having homes that are overpriced everywhere by making money cheaper forever. Eventually rates get cut down to very low levels and you get inflation in the broader economy as a result.

    Home prices must come down, simple as that.

  74. TPS Reporter says:

    Maybe I can stop making my car payment and the government can have my bank bail me out. Maybe my wife and I should have bought a house last year that costs 5 or 6 times my annual salary and then we could have made out like bandits. I think they ought to let the economy correct itself. It will be painful, but a lesson needs to be learned.

    So you tried and failed…lesson is…let the government and banks absorb your failure – Homer Simpson.

  75. ellis-wyatt says:

    Maybe the feds could just give every taxpayer a “bailout” account for life. When we turn 18, the feds open an account in our name and put $10,000 in it. It accrues interest at the prime rate, paid annually and deposited into our bailout account, the last working day of December each year. Then, the first working day of January each year, on a new federal holiday called Bailout Day, we get the option of declaring “bailout” and can access whatever portion of our bailout fund we want. If we don’t declare bailout on that day, the account sits until the next year. Every 10 years (at age 28, 38, etc.) we get another $10,000 under the same terms. The first January work day after your 68th birthday, if you make it to 68, you can declare “lifetime bailout” and you get the entire balance of the account for retirement. If you don’t make it to 68, you lose everything. This would eliminate social security and solve the bailout problems simultaneously. I mean, since we’re printing basically worthless money now anyway, why not do it this way? At least the DC brain trust won’t have to play the political games they’re playing now and everybody can feel good about themselves because they know they have the “bailout” funds there whenver they need them.

  76. SkokieGuy says:

    Let’s face is folks, the irresponsible are frequently rewarded.

    Don’t pay your high interest credit cards? Go to a credit counseling firm and get your interest rate and often your balance reduced.

    Can’t pay your gas bill, in many colder cities, the utility cannot shut off your service during the cold months.

    In Chicago, we had a Summer heat wave some time back where people were dying in record numbers. An alderman suggested that the city buy the poor air conditioners. This former luxury that was around for less than 60 years, somehow was a ‘right’ and it was ‘immoral’ to deny to those with lower incomes.

    Most insurance rates are punishingly high for those (responsible and economically able) to afford. Part of the reason is my insurance rates are paying for the free care that is given to those who don’t have coverage.

    I’m sure we could go on and on. The fact that we live in a society that doesn’t reward the responsible and does reward the irresponsible is nothing new and long predates the current housing crisis.

    Life is not fair. Newsflash: It will continue to not be fair.

  77. Orv says:

    @johnva: Lots of these people bought homes they couldn’t afford BECAUSE homes have gotten so expensive that even entry-level homes are unaffordable to a lot of people…

    Right. I think the high rate of housing price inflation also drove people to overextend so they could get something now, with the idea that they’d have no hope of affording future prices.

    Now things are about to get even worse for those of us who can’t afford a home. All the foreclosures are driving up rental rates as those people find somewhere else to live. You just can’t win in this economy.

  78. johnva says:

    @SkokieGuy: Agreed, but once we start talking about things like propping up housing prices we’re talking about a whole ‘nother scale. Plus we’re undermining the operation of the free market on a grand scale when we do things like this. That will make us worse off, not better.

  79. jeff303 says:

    @SkokieGuy: Also, did you parents actually save for your college education rather than spend all their money on new cars and vacations? Great, then you don’t need any money from FAFSA!

  80. modenastradale says:

    @SkokieGuy: Is it really your position that, because a particular technological advancement didn’t exist an arbitrary number of years ago, it is a “luxury” and can never be considered a basic need? Does that reasoning also apply to running water and antibiotics?

    As for your insurance rates, I am confused. Insurance companies don’t provide care to the uninsured. A large portion of the time, they don’t provide care to the insured, either. You pay higher fees at the E.R. because of overutilization of services there, but I don’t think that’s the driving force behind the skyrocketing premiums and diminished benefits health insurers are offering these days.

  81. rewinditback says:

    this is a horrible idea… people should just learn what their means are before they sign papers with dollars and promises on them. If you couldnt afford an entry level home, you should have rented. It’s not the governments responsibility to bail you out, teach you lessons in life, etc. the banks should have to deal with the mass of foreclosed homes for being abusive in their overlending tactics. the people who borrowed have to learn that valuable lesson.

  82. Techguy1138 says:

    @lightaugust: The consumerist readers who advocate for people to loose their home see wide scale economic depression as the solution.

    I prefer the idea that the banks take a hit on the profitability rather than that happen. But some people think wide scale suffering is cool as along as it fits in their morals and makes them feel better.

  83. modenastradale says:

    @rewinditback: I don’t see why it’s a “horrible idea” or even controversial to suggest that banks will come out ahead by sucking up some principal write-downs rather than foreclosing on worthless collateral.

  84. Techguy1138 says:

    @disavow:
    “For a free-market capitalist, Bernanke sure seems to favor government intervention.”

    Bernake is a realist. His academic area of expertise is the great depression. He is trying to avoid having his name attached to the next one.

  85. dualityshift says:

    How about this folks:

    All those who lied about their income, and have defaulted get booted out. Those who told the truth should get help, providing they are trying to make their payments.

    The mortgage brokers who approved mortgages without income statements should have to eat the loss, and those making payments helped out.

    Who really disagrees that those responsible should deal with the consequences?

  86. JulieG says:

    The financial institutions that hold these mortgages do not want to be left owning a bunch of empty properties in an economy with few buyers. I suspect that many of these homeowners are going to be offered a lease-back option in exchange for turning over ownership. The banks will be able to stretch out their losses over time and the properties will retain their tenants.
    Whatever the outcome of this crisis, it is clear that the homeownership culture in this country is about to change.

  87. bukz68 says:

    @Techguy1138: The problem doesn’t lie solely with the banks. Sure there were bad ones out there who had no business locking some people up in shady mortgages. But there were an equally large number of consumers who gamed the system to get loans they couldn’t afford with the intention of refinancing until they could sell at an obscene profit.

    No one wants to see any sort of economic depression, but at the same time there are a lot of reasonable consumers (the people who lived within their means) get screwed because of the people who didn’t think the whole thing through.

  88. sugarfree100 says:

    I am amazed at the people who blame the consumers for this problem. I am of for personal accountability but this is not the fault of the consumers and anyone who says it is doesn’t have their facts straight.

    1. Who wouldn’t want to buy a house verses living in an apartment? People who bought were trying to get a piece of the American Dream. I guess that was stupid of them huh!
    2. The banks were the ones approving the loans! They gave out the money to people who they knew wouldn’t be able to afford it when rates jumped but they were making money so they didn’t care.
    3. If you were a bank and your dead beat cousin who has bad credit showed up asking for a loan would you give it to them? If you did that is your fault for making a bad decision and that is basically what the banks did.

    I applaud Ben for what he is doing if you cant see he is trying to make things better take and economics class. The more people who stay in their homes the better it is for everyone. The banks are looking at taking a loss and making a smaller profit or kicking people out and making no money at all.

  89. johnva says:

    @Techguy1138: Wrong – we do not see “economic depression” as the answer. All I’m saying is that propping up home prices will actually increase and prolong the suffering, not decrease it. It will help homeowners at the expense of non-homeowners. Why should homeowners get to keep their valuable property that they can’t afford, while non-homeowners get nothing? People bought these unaffordable homes because housing prices were too high. It actually helps more people afford to buy homes for the prices to come down. It will just take a while for the current mess to get sorted out and some economic stability, confidence, and liquidity to be restored. Everyone is better off with cheaper home prices, in the long run…except people who wagered too much of their net worth on a house.

    The drop in values has already happened, and is continuing. There is nothing the government can likely do about it. The government doesn’t bail out people who lose too much of their money in the stock market, do they? No. And in the end, the stock market functions more efficiently as a result.

    I also think there are some business opportunities here. Maybe what we need is more ways for people to hedge their financial bet on the value of their home. For example, perhaps a company could sell insurance that would bail you out if the value of your home dropped too far too quickly (maybe some already do). Or maybe we could let people use options contracts on their own homes to sell the investment risk to investors on the open market (I think someone proposed this one too). It should be possible for people to purchase financial security on the value of their home, if that’s what people want. But that would mean giving up some of the potential gains from an “up” housing market, too. Still, this might be a good thing since it could reduce some of the volatility in the housing market over time.

  90. disavow says:

    @Techguy1138: Touché. According to one study I’ve seen, the Depression was partly caused (or at least exacerbated) by a sudden 2/3 contraction of the money supply in the years closely preceding. We certainly don’t have to worry about that happening….

  91. consumerd says:

    @unklegwar:

    yea, no shit… can’t a responsible person catch a break? After all why should I be stuck paying a 6% mortgage when I can default and get a 4%?

    I mean really, what’s a credit rating now a days?

  92. Thorny says:

    This sounds more like a Publisher’s Clearinghouse sweepstakes for the irresponsible.

    But I’m still curious how adjusting the principle will lower their monthly payments. Whenever I pay off some principle, my payments stay the same — I just end up paying fewer times at the end of my loan!

  93. deadlizard says:

    The problem of punishing the irresponsible is banks make no money out of it. A creative solution would be the banks taking the properties back, lease them to the former owners and once the market recovers, give them the option to re-buy them or kick them the hell out.

  94. johnva says:

    @Thorny: I’m not sure the goal is to lower the monthly payments. Instead, it may just be to give people an out besides foreclosure so that they can sell their home without having to bring more money to the table. That would help people get out of bad situations without going through foreclosure and without the banks being forced to take on ownership of the homes. There might also be some kinds of mortgages where it would lower the payment; dunno about that.

  95. johnva says:

    @deadlizard: Problem is that that involves the banks taking on the (still substantial) risk that the properties will fall further in value. The banks are trying to get OUT of risky investments now, not get into more of them.

  96. Mayor McRib says:

    As a responsible homeowner I have a solution that will make sense for everyone.

    1. Homeowners who are victims (used loosely) of preditory morgages will will be re-financed through the lending institution they are with. They will get the current 30 year fixed finance rate based on their CURRENT credit rating. It should probably be higher if somewhat responsible. If not, they were probably going to default anyway so you can’t save everyone.

    2. The financial institutions will give back CREDIT on the loan for preditory rates that are higher than this new rate for the loan previously. You again are being rewarded for paying and the financial institutions will also learn a valuable lesson.

    This will cause LESS forcloures thus keeping values normal and the burden falls on bad lenders. This will also appease responsible homeowners because values won’t go in the toilet and nobody will get a free ride.

  97. Orv says:

    @Mayor McRib: What are the odds that most of these people would qualify for any kind of 30 year fixed mortgage? They have a home they’re upside-down on and no other assets! No one in their right mind would lend them money now. Actually, it’s going to be pretty tough for anyone to get a mortgage loan at a decent rate in some markets, because the mortgage industry is based partly on the idea that real estate goes up in value. If it depreciates it has much less value as collateral, making the loans riskier.

    I think there was a point when your solution might have worked, but we’re well past that point now. The band is playing “Nearer My God To Thee” and everyone is running for the lifeboats.

  98. FLConsumer says:

    The banks were far less predatory than most scammers / car dealers / phone companies. You have to be 18 (a legal adult) to sign a contract or loan, so start acting like one.

    Just like it’s not the Hummer dealer’s job to make sure you can afford a new Yank tank, or Best Buy’s job to make sure you’re paying your credit cards off in full each month before selling you a brand new plasma TV; it’s not the government’s job nor the bank’s job to make sure you’ve done your due diligence and made sure you could live within your means.

    There’s a good chance that if you are in over your head with your home loan, you probably are in over your head in your other spending as well. Should we bail these people out of credit card debt as well?

    There isn’t anything wrong with the housing market, or the economy for that matter. What we are seeing now is a correction of overinflated prices based on dreams rather than reality. Similar circumstances for our economy. There is nothing wrong with having a recession. They’re quite regular in our economy and much good comes from one in the long-run.

  99. spamtasticus says:

    As long as they dont start using MY tax dollars in order to bail out the people who either bought more house than they could afford or did not bother reading something as imporatnt as a morgage then i’m ok with him suggesting whatever he wants. And before anyone starts flaming, if a mortgage is too complicated for you to read, pay someone who knows (not the guy who is trying to sell it to you) to explain it to you. If you cant afford to pay someone to read the contract for you…. you cant afford a house yet.

  100. memphis9 says:

    ———-REALITY CHECK?

    ###***”Hello, Mr. Mortgage Backed Securities Institutional Purchaser? We’d like your investors *** to okay a rework of terms on this obscenely large pool of mortgages!”

    ###”Hmm…isn’t that bad for us?”

    ***”Even worse if these deadbeats default. Why do you think your investors approved a ***representative with power of attorney to act on behalf of the fund?”

    ###”Power to unilaterally screw the investors? I don’t think we gave you that.”

    ***”Yes, but you could opt to do so now. We’re even looking into trying to mandate that *** through the courts. You know, to Save Home Ownership (and raging, Ponzi-level ***appreciatiation) for us and, um, those who will have to clean up after our senile ***carcasses as we deteriorate there in our price fixed white elephants. Cause no ***WAY will they be able to afford homes at these crazy-ass valuations!”

    ###”That pool of investments (thousands of mortgages) is owned by many more ###thousands of investors. Good luck with the red tape. By the way, do you have all the ###paperwork in order? I hear that judges really don’t like to see us financial guys turn up ###without proof of ownership, and somehow all that paperwork just got kinda ###muddled up with all the buying and selling…”

    ———-Okay, but lets posit that it’s somehow do-able (just as recovering
    ———-all the molecules from a chlorine-free glass of water poured into a swimming
    ———-pool,to the last one and no extras, is doable.) Here’s the next call:

    ***”Hi, Ms. REIT fund manager? We’d love to sell you this shiny new portfolio of top ***quality mortgage loans!”

    ###”Hmm? Are the buyers all prime? Did each and every one put down 20 or 25%?”

    ***”weeeell…we’re definitely getting stricter on prequalifying. For example, any borrower ***claiming to have a job, has to prove that they do!”

    ###”Peachy. You know, I heard that your ’04, ’05, ’06 and even some ’07 shiny new ###mortgage loan issues just aren’t keeping that new-car smell. Something about ###reworking terms after the fact?”

    ***”We’re working hard to keep your business, Ms. REIT fund manager! A default is ***something you don’t want, so even if it takes 40 years, we’ll keep those borrowers in *** their upside-down mortgages. (Okay, ***sometimeswithapartialforgivenessofprinicipal ***ifweabsolutely have to.)”

    ###”I’d like to keep my job. I’ll pass. [click]”

    ———-Next call:

    ***”Good Morning, Fannie,Freddie or Private Mortgage Funder? This is Acme Lending. We ***want to originate a bunch of new mortgage loans, and you haven’t been returning our ***calls.”

    ###”Oops, sorry about that. The thing is, we don’t have any money to give you for ###those loans you want to sell and then unload.”

    ***”How can that be? The government is bending over backwards to eliminate all possible ***prudent limits to your lending, thereby saving the economy – you have a free hand!”

    ###”The thing is, China and other countries really don’t want our paper since they heard ###about the little mortgage cramdown epidemic we’re going through. I’m not sure ###what the problem is, maybe they don’t want to lose money. We’ve already put a ###bunch of pension plans out of business, and those left aren’t really answering my calls. ###Same with various mutual fund and 401K plan managers…really, I’m rather expecting ###myself to get laid off any day now, so to be perfectly honest, I really just don’t care ##about your problems. Sorry. Goodbye.”

    ———-Just one more:

    ***Happy New Year 2012, Mrs. Real Estate Agent. Can I buy a house this year? I have 10 ***years at my $100K/year job now, also I have perfect credit and $50K cash!”

    ###The cheapest house that meets your specific requirements for size and location is ###$60K – and that one is a little small if I recall correctly – only 5 bedrooms and 3 baths, ###though it is VERY well kept…and, uh, hmm…on a cul-de-sac next to the Mayor’s ###House, it says here – sweet! But it just hasn’t depreciated enough from the ’04 ###$750K price. You know, I really, REALLY think we’ll finally hit that bottom THIS ###year…try to save $5K more. Maybe the lenders will be able to loosen up a little more ###by next year, too. Get a raise, and you might qualify for a 10K loan with 55 down. ###Good luck!”

    THE MORAL: Any Borrower Bailout of Any Consequence (Or Even a big Deferment) Will Have Clear Implications for the Future, putting institutional survivors — both domestic and foreign — of the current meltdown on notice. Oh, and it will ***Kill Lending***. THE END.

  101. psyop63b says:

    This happens ALL THE TIME with car loans! When you owe more on your auto loan than you can get for trade-in, it’s called being “upside-down.” With houses, we’re just talking bigger numbers and (they call it being “under-water?”).

    If the bank would write off all of my student loan debt, I’d be happy to relieve them of one of those foreclosed properties they can’t unload.