I’m not sure how closely many of you have been reading all the housing news these days. It pretty much has gone from bad to worse in the media. But the really incredible thing is the ideas coming out of Washington. Ben Bernanke, Chairman of the Federal Reserve, is now calling upon banks to just eliminate or forgive 20% of the balance on mortgages where people are underwater. While this might look like a reasonable financial decision for the banks, I can’t imagine the chaos this will cause. The law of unintended consequences is likely to ensue. Should the banks go this route, I imagine there will be millions of homeowners lining up to talk with their banker about lowering their principal as well. For those of you who were highly responsible and perhaps put 20-30% down on your home…too bad. The government is not here to help you, but only those who were either irresponsible or unfortunate in the timing of their home purchase.
With Mr. Bernanke’s comments this week, I would say stay tuned for a government sponsored bailout that involves the banks. Perhaps the bank will indeed eliminate 20% of the principal on some of these mortgages and the government (i.e. U.S. taxpayer) will likely have to come up with some form of payment to the banks. How about this? How about we, the U.S. taxpayer, provide the banks with 50 cents for every dollar they eliminate on a homeowners principal? I don’t think this is too far fetched.
Secondly, The Wall Street Journal published this idea yesterday by Martin Feldstein, former economic adviser to President Reagan and current Harvard professor. The op-ed article entitled, “How to stop the mortgage crisis” basically allows for a “loan-substitution program” whereby the Federal government would lend under water homeowners 20% of the mortgage at very low interest rates. The homeowner would need to pay back the Feds within 15 years. Tanta at Calculated Risk takes this idea to the wood shed.