Mortgage Principal Reduction?

This idea was floated not long ago by the Fed's chairman in a speech in Florida. It is clear that lenders and those who bought those mortgages fear that idea simply because it will affect the value of their assets. The books look good with high mortgage balances that lenders try to modify, re-structure or delay the foreclosure by 90 days. The reality is that the sustained losses in appraised value has been doing just that and will continue until a solution is found.

Making that change now will be a win-win situation for the lenders and the home owners. People who see no reason to continue paying for a mortgage that is higher than their homes will have an incentive to keep them and pay the lenders. Although this will not eliminate foreclosures, it will at least keep them from increasing drastically. The costs associated with foreclosures with be cut and the impact on neighborhoods will be positive: less board ups and less crime.

This voluntary move will also curtail current efforts by our elected officials to convey to judges the power to review mortgages in case of bankruptcy. Lenders must ask themselves what option is best suited to deal with declining home values: the courts or the board rooms? The many write-offs that continue to shake banks and other financial institutions are just an indication that things are not well. A decision by lenders to review their mortgage portfolios and adjust their values through principal reduction will signal and end to the housing crisis. The resulting situation is even tighter lending requirements that will further strengthen the sector simply because only qualified borrowers will get new loans.

A review of current solutions shows that they are only addressing the interest rates or the loan sizes not the property values. People who owe more than their homes are worth cannot refinance, period. The idea that a new institution should be created and funded by the government whose purpose will be to acquire delinquent mortgages with tax payer funding does not make sense. It shifts the burden from the lenders to the general public which is unfair. Taking responsibility for one's actions should be the way to solve the housing mess.

The principal reduction is an idea whose time has come. Short-term fixes simply prolong the misery and delays reckoning.
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