HaloScan.com - Comments

wally writes:
Gosh, what could go wrong with a great plan like this????
wally | 03.04.08 - 10:06 am | #

iceman writes:
Sure Ben, go ahead and suggest that. After all, its not your money.
iceman | 03.04.08 - 10:07 am | #

girlbear writes:
This is an outrage! "Oh, you can't pay your loan, well lets just cut it in half, there, is that better?"
girlbear | 03.04.08 - 10:08 am | #

Brandi writes:
Like.... does anybody know like.... when Amerikan Idol is on?
Brandi | 03.04.08 - 10:13 am | #

Henry writes:
Hey, NCC!

Reduce THIS!
Henry | 03.04.08 - 10:14 am | #

borkafatty writes:
ok so could i please have the hot line...why in gods name should i continue paying my mortgage on time or for that matter pay at all...Moral Hazard.
borkafatty | 03.04.08 - 10:14 am | #

Charles II writes:
CR, this approach makes no sense to me, so perhaps you could explain. Borrowers need temporarily lower payments. In the outyears inflation (or, rather, raises to compensate for inflation) should lighten the burden of payment. Reducing principal will reduce payments in both the present and the future, making it a terrible deal for lenders. Why not simply forego resets for 5 years?

Negam is really only an incentive (to a non-speculator) to abandon a house if (a) job loss or health problems make payment impossible, or (b) there is a need to move in the near future. After 10 years, even a 50% negam is wiped out by inflation. But for a lender to do that at a stroke of a pen requires taking a major hit.
Charles II | Homepage | 03.04.08 - 10:14 am | #

manu06 writes:
Gee, I feel like a dope for paying off my mortgage
last summer. I should have asked for a discount.
manu06 | 03.04.08 - 10:16 am | #

remsem writes:
i can has principal reduction?
remsem | 03.04.08 - 10:16 am | #

Anonymous writes:
Reducing principal is the worst moral hazard of all.

Let the irresponsible asshole who bid $100000 more than they could ever afford, and got the house by outbidding the responsible bidder, let the asshole get the relief now.

This Bernanke guy is the most criminal of them all.

Some of us who bid in 2004 only to be outbid are now going to get royally screwed by the Fed chair-whore.

This is just asking for serious civil discontent.
Anonymous | 03.04.08 - 10:18 am | #

Cobradriver writes:
Mommy,my head hurts...

Chris
Cobradriver | 03.04.08 - 10:18 am | #

Dr. Wu writes:
Ben, yesterday: "We know that speculation increased in recent years; a resulting increase in foreclosures is to be expected and does not warrant any relief. People who speculated and bought investment properties in hot markets should take their losses just like day traders who speculated and bought soaring tech stocks in 2000."

Ben, today: "Never mind."
Dr. Wu | 03.04.08 - 10:19 am | #

remsem writes:
Charles II writes:
CR, this approach makes no sense to me, so perhaps you could explain. Borrowers need temporarily lower payments. In the outyears inflation (or, rather, raises to compensate for inflation) should lighten the burden of payment. Reducing principal will reduce payments in both the present and the future, making it a terrible deal for lenders. Why not simply forego resets for 5 years?

Spread the hit over multiple periods throughout the serviced life of the loan rather than take a large hit upfront with foreclosure costs and having to write-down the portfolio with REOs. my 2 cents.
remsem | 03.04.08 - 10:19 am | #

Rob Dawg writes:
What I don't understand is the necessity for the banks to use negative equity as the qualifying criterium. Why not whether the borrower signed in blue versus black ink for instance?

But since Tightrope Ben is in a mood to correct past errors in judgement and bookkeeping I have a few suggestions. Disgorging past bonuses and profits from the vintage when these loans were generated comes to mind.

Remsem,
You don't get it. You cantz haz prinzipal reductionz becauz u b a CR readerz. Evidence enough that you don't qualify.
Rob Dawg | Homepage | 03.04.08 - 10:23 am | #

nades writes:
This has gone from a fender bender to a ten car pile up.

Its like watching a train wreck....

At least Ben has realized that this thing has just started and hes not saying we're thru it....
nades | 03.04.08 - 10:23 am | #

iceman writes:
The fact that BB is suggesting this means that he is realizing just how completely screwed the banking system is. Additionally, it shows just how fearful the Fed is of the waves of foreclosures that are hitting and about to come ashore.
iceman | 03.04.08 - 10:24 am | #

Journeyman writes:
If this was all going to blow over by next week there would be no need for such extreme measures.

Hmmm...
Journeyman | 03.04.08 - 10:26 am | #

Deal Junkie writes:
agree with anon. to a certain extend. Since when are people not responsible for their own actions? For the lenders though, sometimes some cash flow is better than no cash flow at all. still the solution is terrible for the CDO investors.
Deal Junkie | Homepage | 03.04.08 - 10:26 am | #

Boat52 writes:
why stop at home loans Ben? How about cars, boats, RVs, anything that is now worth less than at purchase.

The only hope is that whoever is the new president, he/she asks for Ben's resignation sooner rather than later.

If Warren Buffett doesn't want Ben to run one of his business since Ben is an economist, we certainly don't want Ben at the helm of the most important business in the U.S.....it's central bank.A message to Mr. Ben B: Please go back to teaching and write another book. Stop messing with the free market and let it correct. Much better in the long term, that is after you are gone from the Fed. Thx.
Boat52 | 03.04.08 - 10:26 am | #

energyecon writes:
Without addressing the moral hazard issues op. cit., isn't there a significant regulatory hurdle with respect to principal reductions for securitized mortgage loans?

Absent any legislative fixes, can't this approach be applied only to loans banks carry on their balance sheets?
energyecon | 03.04.08 - 10:27 am | #

Mel writes:
This demonstrates that the fed has numbers to show things are worse than we already know--and that's not comforting.
Mel | 03.04.08 - 10:27 am | #

safe_as_apartments writes:
I expect that down payment requirements would become onerous after an era of principal reductions (if it comes to pass).

No bank is going to lend money in a situation in which it is even remotely likely that borrowers (as a class) will be significantly underwater. I wouldn't be surprised if 50% down payments again becomes the norm.
safe_as_apartments | 03.04.08 - 10:27 am | #

Bruce writes:
The tide suddenly went away from the shore. BB and crew were busy picking up the stranded fish and trying to put them back into the water. Looking off into the distance BB sees a ridge that is apparently moving toward the shore. Only too late does he realize he is screwed......
Bruce | 03.04.08 - 10:27 am | #

nades writes:
The fact that BB is suggesting this means that he is realizing just how completely screwed the banking system is.

Check!

BB's statement is so egregious it makes me think there is a tsunami right behind it...

Maybe everyone here is an optimist.... Whoaa boy, thats trouble...
nades | 03.04.08 - 10:27 am | #

Anonymous writes:
Isn't this just another attempt to prevent true price discovery?

Are they going to force all future appraisals in the area of principal-forgiven homes to be decreased by the largest amount of forgiven principal?

"We don't want to admit the house isn't worth $300000, so here is $150000....there, now it's again worth $300000."

I used to think Greenspan was the worst Fed chair ever, but I'm rethinking that assessment. Ben, you're a true idiot!
Anonymous | 03.04.08 - 10:27 am | #

Curmudgeon writes:
Please, obstructionist GOP senators, please keep on running down the clock as much as you can so the worst borrowers get foreclosed on before government-instigated policies like principal reduction become pervasive. Justice must be served.
Curmudgeon | 03.04.08 - 10:28 am | #

Yal writes:
This is half of the plan I suggested a year ago.

The second half was : raise interst rates .
Yal | 03.04.08 - 10:29 am | #

Kp writes:
Eliminating failure is the surest way to kill success.
Kp | 03.04.08 - 10:29 am | #

Zero writes:
Bernanke is correct that it's in everyone's interest to keep homeowners in their homes and that investors will likely write off a large portion principal, due to lending practices lacking principle. But lenders would rather take a guaranteed larger loss later than a potential limited loss today. Tanta's ubernerd post on mods and loss mit indicated that the process is time-consuming and requires expertise. For lenders who couldn't even bother to do proper underwriting in the first place, it's so much easier to close their eyes and pretend.
Zero | 03.04.08 - 10:30 am | #

ac writes:

Fed Chairman Bernanke today called for lenders to reduce principal on homeowners with negative equity.

Kinda like a short sale to the existing owner? That makes sense superficially.

But where do the banks get the money to do this?

And can I have the principal reduced on my car loan?

How about my credit card?

Do I have to miss a few payments for that to happen, because if so that can be arranged.

ac | 03.04.08 - 10:30 am | #

Kirk Spencer writes:
My layman's nickle view of what is going on in Ben's mind here is that he's trying to avoid one of the massive historical facts of the Great Depression.

A lot of people lost homes because they couldn't pay any more. They couldn't get loans modified, not least because their collateral (the property) wasn't "worth" what they needed to clear the difference. Sure, deflation and unemployment hit it as well, but that bit of being underwater played a big part as well.

As CR and others have noted, a housing-led recession is pretty close to the ugliest kind. It's both massive and slow to change course. The massive makes it have significant impact, while the slow, well, that should be obvious.

I really think Ben's trying to head off a problem he sees hitting in about six months, knowing if we wait till it IS a problem we won't be able to do a darn thing about it.

I also happen to think his chances of the banks cooperating with this action at this time are very low.
Kirk Spencer | 03.04.08 - 10:31 am | #

MAB writes:
Down payments and higher mortgage rates seem a certainty.

Regardless of any debt forgiveness or modifications, house prices will continue to fall.
MAB | 03.04.08 - 10:32 am | #

Neal writes:
The problem with this solution is that the financial institutions are already struggling for their life. Writing down the value of more assets is the last thing they can do at this point.

It's a solvency issue that won't be helped by making the losses explicit more quickly.
Neal | 03.04.08 - 10:34 am | #

safe_as_apartments writes:
I could be wrong, but doesn't bankruptcy entail having the principal reduced on auto loans and CCs? All of us know that by most definitions, many households are completely and totally bankrupt. If so, why can't bankruptcy rules work for mortgage loans?

I don't see an obvious problem here, provided cramdowns are applied to principle residences and the borrower does not get the benefit of future appreciation.

Am I missing something?
safe_as_apartments | 03.04.08 - 10:34 am | #

Mike writes:
Ach, and I just sold my citigroup puts for 60% profit.

Ben's gonna make me wish I was an asshole who bought more house than I could pay for so I could get my principal reduced.
Mike | 03.04.08 - 10:36 am | #

ac writes:

why stop at home loans Ben? How about cars, boats, RVs, anything that is now worth less than at purchase.

I see you beat me to the punch.

Well, that's the point of the policies Bernanke has advocated in the past -- to cure economic problems buy devaluing the loans people have made and allowing people to go back on their promises.

However, to have a healthy economic I would think it essential to have trust between borrowers and lenders and the medium of exchange they use (the dollar).

In my simple mind I don't quite see how these policies cultivate such an environment.

ac | 03.04.08 - 10:37 am | #

jwm in sd writes:
So would you all rather that BB suggest that the FED monetize the forgiven principle? This puts it squarely back on the Banks and the investors. As far as price discovery goes, well, the banks certainly will want better appraisals now that they had to take losses.
jwm in sd | 03.04.08 - 10:37 am | #

tyaresun writes:
Can anyone tell the difference between Ben Stein and Ben Bernanke anymore?
tyaresun | 03.04.08 - 10:37 am | #

ac writes:

Eliminating failure is the surest way to kill success.

I think that's what a lot of people want.

I think people would rather have 2.5% GDP growth per year vs 3.5% GDP growth per year if it felt safer and more predictable.

However now that we have to compete with so many other economies for resources that might not be a viable option.

ac | 03.04.08 - 10:39 am | #

borkafatty writes:
I just complied this email to my lender:
So i am going through This mornings Fed statement about reduced principle request or reduced interest rate requests. How does one go about requesting such a thing...I pay my mortgage on time.. I am trying to figure out my incentive to continue to do so. What is my incentive to continue ? Do i have any options or do i have to be losing my home for options...inquiring minds would like to know. I have lived in this home for 15 years..yes i see it losing value..and want to remain in this home...what is my incentive? I would love to be paying less...offer me a reduced interest rate no strings attached....help out the ones that want to remain in their homes...again what is my incentive.
borkafatty | 03.04.08 - 10:40 am | #

mp writes:
Everyone is fiddling while Rome burns.

If the banks, our brilliant leadership, and the Fed can't agree on something and *now*, the system is going to lock up.

It is cute to quip about it here, but that's the long and short of the problem.
mp | 03.04.08 - 10:40 am | #

SC writes:
I never though I'd hear a Fed chairman suggest something so at odds with modern capitalism. The moral hazard here is profound. Bernake is unfit for this job.
SC | 03.04.08 - 10:40 am | #

michael schumacher writes:
lost in all of Benny boy's comments is the actual reason for doing so.

They could care less about individual homeowners however as the entire financial system is over-run with debt instruments created on the backs of that bad loan you begin to see his motivation for speaking to the homeowners....and attempting to "forstall"-his words not mine- the coming tidal wave of resets.

This is all about leverage and what an additional 5-10% decline will do to those...

Good Luck with that Ben..

Ciao
MS
michael schumacher | 03.04.08 - 10:41 am | #

ARW writes:
This is a setup. The next card that will be played will be for the government to pay compensate the banks for a reduction in principal or buy the mortgage and then reduce the principal.

Reducing the principal is the end game to bailout WS and banks.
ARW | Homepage | 03.04.08 - 10:42 am | #

Rob Dawg writes:
Now that I've had a chance to reconsider I'm even more mystified. Eschewing all the sociopathic impetuses what strikes me as that this idea will ultimately result in worsening the very aspects Tightrope Ben is seeking to ameliorate.

There is an incentive for tens of millions of homeowners to come in with a lowball appraisal. Gee, how hard is that in the current environment of starving appraisers, cascading REO comps and niggardly lenders? Result; people with 10-15% equity rush to the bank with their $350 appraisal and ask for their principal reduction. Then off to the county seat to get their property tax deduction. Secondary effect; a whole new raft of comps based on recent appraisals such that those with substantial equity find their houses worth less as well. And face it, a lot of the people who get principal reductions are of the will-o-the-wisp variety. They'll use the new lower debt to flood the market with their houses to avoid getting burned twice.

More appraisal fraud. Check.
Lower home prices. Check.
Reduced municipal revenues. Check.
More inventory. Check.

How can this guy have gotten so inurned so quickly that he is suggesting we throw millions of people under the bus just to try and keep red ink of some bank balance sheets.
Rob Dawg | Homepage | 03.04.08 - 10:42 am | #

TheFinancialNinja writes:
Reducing principle could be a little bit of a problem, considering the banks don't exactly have a bunch of extra cash sitting around.

Really Scary Fed Charts: March
TheFinancialNinja | Homepage | 03.04.08 - 10:42 am | #

Stuart writes:
One wonders if Ben realizes how much this would translate to in terms of losses for the banks. No wonder the FDIC is staffing up.
Stuart | 03.04.08 - 10:43 am | #

stockmarketadvantage writes:
I guess I shouldn't have bought those bank stocks 6 weeks ago. This just keep getting worse and worse. Kiyosaki was recommending silver this morning up to $25 an ounce. What is holding the Dow above 12,000?
stockmarketadvantage | Homepage | 03.04.08 - 10:44 am | #

Cobradriver writes:
"This demonstrates that the fed has numbers to show things are worse than we already know--and that's not comforting.
Mel | 03.04.08 - 10:27 am | # "

This is one of those things that needs reposted once in a while...

Chris
Cobradriver | 03.04.08 - 10:44 am | #

gc writes:
In the proposal, who decides? Bankruptcy reform was defeated. So we don't want the bankruptcy courts to regulate this. It seems the outrage is overblown because the proposal is another aspect of Mr. BB's "tinkerbell" philosophy, as David Wessel of the WSJ referred to it on NPR this morning.
gc | 03.04.08 - 10:44 am | #

mp writes:
"What is holding the Dow above 12,000?"

DENIAL.
mp | 03.04.08 - 10:44 am | #

NoVAMtgeBkr writes:
I'm distressed...and I'm gonna stay distressed until I get a principal reduction.

I'm also gonna hold my breath until I turn blue.
NoVAMtgeBkr | 03.04.08 - 10:45 am | #

Stuart writes:
Quick, someone call 911 for NoVAMTgeBkr.
Stuart | 03.04.08 - 10:45 am | #

Gawains Ghost writes:
One of the main problems with foreclosures is when the borrower/occupant sues for wrongful foreclosure. Even if he doesn't have a case, once he files a lawsuit it has to work its way through the court system until a judge renders a decision. That could take up to two years.

I know a guy who bought a foreclosed property on the court house steps, thinking he could flip it. The borrower/occupant sued for wrongful foreclosure. He lived in the house rent-free, without making any loan or tax payments (only untilities) for two years, and when he finally vacated after the judge ordered him to, he gutted the house.

The guy who bought it ended up losing $40,000.
Gawains Ghost | 03.04.08 - 10:47 am | #

mp writes:
I really don't think many of you here realize just how dire the situation is. If you did, there wouldn't be so much sarcasm and cute remarks.

The situation is *bad*, and it's becoming worse.
mp | 03.04.08 - 10:48 am | #

ac writes:

Everyone is fiddling while Rome burns.

If the banks, our brilliant leadership, and the Fed can't agree on something and *now*, the system is going to lock up.

It is cute to quip about it here, but that's the long and short of the problem.

It's not enough for the Fed and our brilliant leadership to agree on something.

They have to agree on something that will make the situation better.

So far I see no evidence that they have that ability.

It may well be that the underlying problem is that parts of Rome do more harm than they do good and need to be reduced to ash to have any real long-term improvement.

Again, the US has been one of the greatest economic success stories in history despite 3 depressions. And right now I don't see that we're facing anything so bad as that.

ac | 03.04.08 - 10:48 am | #

franz writes:
Why do I keep losing my faith in the FED? Oh that's right, the old FED chairman can't keep his mouth shut about how bad it is and the current FED looks like a deer in the head lights of an approaching train. Actually, I feel really bad for Ben as he will be an one-term FED chairman due to the hand dealt to him.
franz | 03.04.08 - 10:49 am | #

Rob Dawg writes:
NoVAMtgeBkr, don't do that honey. Here, if you stop holding your breath Uncle Ben will give you a pony. Won't you Uncle Ben?
Rob Dawg | Homepage | 03.04.08 - 10:49 am | #

Anonymous writes:
"The situation is *bad*, and it's becoming worse.
mp"

Good, modern capitalism is a bad joke, and needs to be replaced ASAP.
Anonymous | 03.04.08 - 10:50 am | #

Tom writes:
If the Fed can now urge lenders to reduce principal on underwater mortgages, then why do the Shrubbies still have a problem with bankruptcy cramdowns? At least with cramdowns there will be a federal judge examining whether the current mortgage is affordable, balancing it against any other secured creditors, and supervising the borrower's finances for the next several years. The cramdown would be targeted, specifically, towards those Paulson said yesterday he wanted to help: people who can't afford their current debts who want to stay in their home.

Plus, with a law the provision would apply to every such transaction, we wouldn't have to listen to officials whine that some banks won't play nice.
Tom | 03.04.08 - 10:51 am | #

Kett82 writes:
We are all socialists now!
Kett82 | 03.04.08 - 10:51 am | #

test writes:
why apply this to distressed borrowers? why not qualify all borrowers? can i rush out and get a jumbo loan and get instant 50% discount? i sure would love that
test | 03.04.08 - 10:52 am | #

nades writes:
mp,

I do see how bad this has become. It has to be that bad to issue a statement like this.

We're talking about a systemic failure.

Besides loading up on puts what else can we do? (The puts part was a joke)
nades | 03.04.08 - 10:52 am | #

test writes:
why limit mortgage loan, what about commercial loan, auto loan. credit card loan? can we all get 50% instant reduction?
test | 03.04.08 - 10:53 am | #

Optimistic Joe writes:
What the heck? If I (the lender) can make more money on a reduced principal than in a foreclosure, then this is no more than common sense. I guess sometimes lenders just need some encouragement from the FED. No need to feel outrages here at all.

BTW: where's my recession, dude?

O-Joe
Optimistic Joe | 03.04.08 - 10:53 am | #

George writes:
I´ve found that most things in life can be explained by scenes from Star Wars.

In this scene, after a failed rescue attempt, Ben is screaming at C3PO to shut off all the garbage compactors on the detention level.

He is really sounding desperate now.
George | 03.04.08 - 10:53 am | #

Rob Dawg writes:
The best of capitalism and socialism all in one policy:
"To each according to their desires, from each according to their abilities."

[Unfortunately for those of us with the ability to pay more we know what this means.]
Rob Dawg | Homepage | 03.04.08 - 10:58 am | #

Ellen writes:
In this scene, after a failed rescue attempt, Ben is screaming at C3PO to shut off all the garbage compactors on the detention level.

I think you mean Luke.
Ellen | 03.04.08 - 10:58 am | #

Feeding Trolls writes:
just don't
Feeding Trolls | 03.04.08 - 10:58 am | #

query_tool writes:
rob dawg writes:
More appraisal fraud. Check.
Lower home prices. Check.
Reduced municipal revenues. Check.
More inventory. Check.

I'm not sure it matters Rob Dawg. If the houses go to FC instead, we still get #2-#4 on your checklist.

This has nothing to do with renters and responsible homeowners, or moral hazard, or anything else. This is about LOSS MITIGATION. This is about BB trying to get the banks to do what is best for the banks.

If you're sitting on the sideline, and you don't like this, too bad. If this is the least-worst option for the banks, they'll do it (yes, yes, I know, if they can even execute on this).
query_tool | 03.04.08 - 11:00 am | #

Kett82 writes:
RD…exactly…

"To each according to their housing options, from each according to their ability to make payments."
Kett82 | 03.04.08 - 11:01 am | #

charlie writes:
This is only a suggestion. Not a mandate. Nothing will change as a result of Ben's comments. I'm sure the banks already realize one option is to reduce the principal owed. The main reason this is a bad idea is once it's known banks are doing this, everyone will want in and it will make a bad situation worse.

This idea, while I don't agree it's a good idea, is way better than the proposal in New York to not allow evictions. Talk about a stupid idea. People can stop paying their mortgage without any penalty whatsoever.
charlie | 03.04.08 - 11:01 am | #

Dr. N writes:
I'm going to have to side with O-Joe on this one. What else do you expect the Fed Chief to say? He would like to see fewer foreclosures and he is suggesting that in some cases it is to the financial advantage of lenders to entertain mortgage cramdowns rather than foreclose and that they should look harder at those options. What's wrong with that? Of course it takes some work to decide which is the better option.
Dr. N | 03.04.08 - 11:02 am | #

ron writes:
BB finds himself holding a huge ball of string that keeps unwinding.
ron | Homepage | 03.04.08 - 11:03 am | #

Chicken Reel writes:
So I send my keys off via 'jingle mail' and the next day I get a package from the bank containing:

The Keys
A Toaster
Principal Reduction
Chicken Reel | 03.04.08 - 11:03 am | #

ac writes:

We're talking about a systemic failure.

Besides loading up on puts what else can we do? (The puts part was a joke)

In a real systemic failure property rights might become meaningless.

So the idea of loading up on any kind of financial asset may indeed be a joke.

ac | 03.04.08 - 11:03 am | #

Bob_in_MA writes:
I paid off a mortgage a couple years ago, too.

I wonder if we can sign up for a pre-discounted mortgage?

Actually, in spite of all the problems it may cause, I really think this is the the best course. It's kind of like Churchill's view of democracy: it's the worst form of government--except all the others that have been tried.

Thing of all the costs of all the dislocations as someone gets foreclosed on (or walks away), needs to find a place to rent, old house sits as deteriorating REO for six months, that neighborhood goes further down the tubes, etc.

In total costs to society, it would probably be better to err knowing you will cut a lot of peoples' mortgages that don't really need them to be cut, than to go through the alternative.
Bob_in_MA | 03.04.08 - 11:04 am | #

Human writes:
I think a progressive negative payment tax would solve this. It could apply to mortgage payments, car payments, and credit card payments. The more you pay, the more the amount is reduced by the fed. This would stimulate the economy and with government deficits being paid by future generations we would be good for years.
Human | 03.04.08 - 11:05 am | #

remsem writes:
I can haz open can of worms?
remsem | 03.04.08 - 11:05 am | #

Dirk van Dijk writes:
Sounds to me like Ben is weighing in on the cramdown proposal. Heck he is going a step further and saying do the cramdowns first. The Democrats in the Senate are saying you have to file bankruptcy (and that is a BIG step and no fun at all) to get a cramdown. The banking industry's head is exploding at that proposal, and Ben is saying just do it, its in your best interest Mr. Banker. If you owe $400K on a house worth $300K, then cutting the rate from 7% to 5% doesn't really give you that much incentive to stay there. A principal reduction gets to the heart of the negative equity problem. Of course it will cause more havoc on banks balance sheets.

In general my recation to his speech was, most of the people here at CR could have given this speech in August, if not earlier.
Dirk van Dijk | Homepage | 03.04.08 - 11:06 am | #

bluestatedon writes:
Rob Dawg hit on one of the wonderful ironies in this situation.

Appraisal fraud played a huge role in the upside of the bubble; everybody involved had a vested (albeit short-term and short-sighted) interest in submitting ridiculously high valuations.

Now Bernanke's plan gives equal incentive for more fraud, only now in the opposite direction.
bluestatedon | 03.04.08 - 11:06 am | #

Anonymous writes:
The problem is that the banksters still think they can bleed the public to bail out their losses.

But squeezing an exsanguinated middle class produces no juice.

It can only be gotten from the hedge fund elites.

When they finally realize THAT, this might start improving.
Anonymous | 03.04.08 - 11:06 am | #

JJL writes:
Wow! BernanSpan is really going off the deep end now. To echo the comments here already, why not reduce all debts for anyone and everyone? This is silly and sad.

Another problem is that BernanSpan and company STILL DO NOT GET IT as it pertains to this era of foreclosures. Here is what I wrote last night:
"The primary purpose of purchases made during the boom years was price appreciation and access to said appreciation. The "use" of the home was a money well, not an "investment". Now that the well is dry, the utility of the home has been erased. Again, like Mish says, a bad credit spot is the "breakup fee" for the business deal, and one many will gladly pay to get out from under long term debt service on a depreciating asset that now has no utility. This is the point that the powers that be simply still do not get. Absent rapid price appreciation and free and constant access to it, the purchase of a home will no longer serve many borrower needs. This is why foreclosures are rapidly escalating. This is why people that CAN pay their mortgage are choosing NOT to pay. If you agree to my premise of the loss of utility of the home, then this all makes sense. It will also make basically all of the proposed bailout plans useless, unless they restore 10% plus price appreciation per year and right away. I am wondering when that plan will start to be circulated!"
JJL | Homepage | 03.04.08 - 11:07 am | #

albrt writes:
MP:

What are we supposed to do? Diebold and the Supreme Court elected a delusional retarded guy president. His appointees have been systematically destroying the country for seven years. The American people, including the fairly representative sample in Congress, simply don't have the backbone of the Pakistanis or the Kenyans or any of the other oppressed countries where the folks are at least trying to protest what's going on.

Might as well make a joke or two.
albrt | 03.04.08 - 11:07 am | #

Bob_in_MA writes:
So the idea of loading up on any kind of financial asset may indeed be a joke.
ac

Yeah, remember, puts (and the negative ETFs that use them) are essentially derivatives, and there certainly is the possibility of counter-party risk. What if Proshares used some complex puts bought from a hedge fund for one of their double-negative ETFs?
Bob_in_MA | 03.04.08 - 11:07 am | #

Shylock writes:
Wave the magic wand and all that "excess" principal disappears. Why not? That's how it was created in the first place, the joys of fractional reserve lending.
Hey Ben! Mr. SmallBusinessOwner here. I have a couple of deadbeat customers from last year who just won't pay their bills(you know those fortune 500 types). I would like to reduce the principal on their debt but the problem is that that principal came out of our treasury, it was real money we worked very hard for the year before. Can we borrow your big black Fed tophat and pull some cash out it?
Shylock | 03.04.08 - 11:07 am | #

eh writes:
How can anyone have an ounce of respect for Bernanke at this point? I guess he did paper, scissors, rock or something to decide that banks and mortgage holders should get screwed rather than the co-conspirator homebuyers. At least many of the people who bought MBS paper did so in good faith, e.g. after looking at the AAA rating.
eh | 03.04.08 - 11:08 am | #

Gareth G writes:
I believe that Bernanke's statement is nothing more than a bit of ass covering on his part. He can at least pretend that he has given the banking system some sage advice in advance of the tsunami he sees rolling in.
Gareth G | 03.04.08 - 11:08 am | #

bluestatedon writes:
""We know that speculation increased in recent years; a resulting increase in foreclosures is to be expected and does not warrant any relief....."

Dr. Wu, in fairness to Helicopter Ben, I think this statement was Hank Paulsen's. It does seem curiously at odds with Ben's plan though, doesn't it?
bluestatedon | 03.04.08 - 11:08 am | #

Dirk van Dijk writes:
why stop at home loans Ben? How about cars, boats, RVs, anything that is now worth less than at purchase.
Boat

All these sorts of loans can be modified by a bankruptcy judge, with the exception of a home loan. The question is why stop at the mortgage?
Dirk van Dijk | Homepage | 03.04.08 - 11:08 am | #

Hiding in NM writes:
Did Ben just announce that the emperor has no clothes?

How does Ben's (50% write down) declaration impact the valuation of the various mortgage-related securities we're all familiar with?

Will his declaration this morning make them worth even less than their current carry value?

What does it do to the rating companies, the GSE's and the investment banks, as well as the commercial banks?

-- Hiding Out
Hiding in NM | 03.04.08 - 11:09 am | #

Turtleboy writes:
I remember telling a realtor friend of mine in 2003 that I would rather buy real estate in a high rather than low-interest rate environment because over the course of 30 years, I would probably always have a chance to refinance to a lower interest rate, but not a lower principal.

Now I'm starting to feel a bit naive...
Turtleboy | 03.04.08 - 11:09 am | #

Anonymous writes:
Since when is denial optimistic?
Anonymous | 03.04.08 - 11:10 am | #

albrt writes:
Don:

Don't talk to Dr. Wu like that - she's actually Marcy Kaptur.
albrt | 03.04.08 - 11:10 am | #

Newbie writes:
WAAA! I want my principal reduced!
Newbie | 03.04.08 - 11:10 am | #

remsem writes:
bluestatedon writes:
Rob Dawg hit on one of the wonderful ironies in this situation.

Appraisal fraud played a huge role in the upside of the bubble; everybody involved had a vested (albeit short-term and short-sighted) interest in submitting ridiculously high valuations.

Now Bernanke's plan gives equal incentive for more fraud, only now in the opposite direction.
bluestatedon | 03.04.08 - 11:06 am | #

there will still be incentive for appraisal fraud in the normal direction as banks/holders/servicers will want to minimize property value reductions in order to minimize mtm losses. and who do you think will be responsible for assessing the amount of negative equity in any given property?
remsem | 03.04.08 - 11:12 am | #

Heckie Green writes:
Heck, why stop at modest 'principal reduction'?

Why not just forgive ALL debts, suspend contract law, tear up all deeds and re-boot the whole system?
Heckie Green | 03.04.08 - 11:12 am | #

nades writes:
Does anyone think there is a chance that BB or congress will end up sending me a down payment for my first house?

It'd be pretty nice....

ac, good point! thanks....
nades | 03.04.08 - 11:12 am | #

jm writes:
Alas, we're now in the position of needing to find the least-bad course of action.

As Robert Dawg notes, a plan such as this will lower market prices rapidly. If the debt on the home is cut in half, an owner wanting to sell will be able to sell at half price without having to bring a check to the closing (which most could never do), or try to negotiate a short sale with the bank.

At least with an approach such as this we will once again have a functioning housing market in which first-time buyers will be able to purchase without having to pay the current owner a fortune.

Of course this will "bail out" the people who used their homes as ATMs -- but face it, they've already spent the money and will never pay it back, anyway. And if they're foreclosed upon in the current climate, they'll be able anyway to move into a nice rental somewhere at low cost. There's not much we can do to punish them.
jm | 03.04.08 - 11:13 am | #

tj & the bear writes:
mp,

I hear you. Difference with me is that I've been convinced from the beginning that TPTB couldn't do anything but aggravate the situation. That's their track record.

p.s.: All the indices are looking to break support today. Even PMs are taking a hit.

tj & the bear | 03.04.08 - 11:13 am | #

Anonymous writes:
"In a real systemic failure property rights might become meaningless."

And they should. Henry George was right all along. Property rights are one of the core tenet fallacies of modern capitalism. It is clearly the biggest driver of Ponzi finance.
Anonymous | 03.04.08 - 11:14 am | #

Rob Dawg writes:
query_tool writes:
This is about LOSS MITIGATION. This is about BB trying to get the banks to do what is best for the banks.

Yes, I absolutely understand the intent is about doing what is best for the health of the banking industry. My point is that lowering principal balances on some loans is so fraught with secondary consequences that IMO it isn't in the best interests for banks to pursue this idea.
Rob Dawg | Homepage | 03.04.08 - 11:14 am | #

tedzbear writes:
Why help these particular homeowners and not all of the homeless people out there who could sure use a home too???

It's not fair!!!
tedzbear | Homepage | 03.04.08 - 11:14 am | #

ac writes:

My layman's nickle view of what is going on in Ben's mind here is that he's trying to avoid one of the massive historical facts of the Great Depression.

A lot of people lost homes because they couldn't pay any more. They couldn't get loans modified, not least because their collateral (the property) wasn't "worth" what they needed to clear the difference. Sure, deflation and unemployment hit it as well, but that bit of being underwater played a big part as well.

As CR and others have noted, a housing-led recession is pretty close to the ugliest kind. It's both massive and slow to change course. The massive makes it have significant impact, while the slow, well, that should be obvious.

I have less problems with the idea of some kind of bailout than I do with all the effort put into finding creative methods of bailing people out that minimize the short-term political consequences.

To me this is underhanded and culturally degrading.

If you want to bail people out do it the right way so there's accountability and awarness of the costs of screwing up on a collosal scale -- tax the population explicitly and use that money to bail people out.

Let people understand how and why their money is being taken from them and make a case for why this is necessary.

Don't try to hide it via inflation or other forms of stealth tax hikes.

This is just more of the kind of deceptive maneuvering that got us here to begin with.

ac | 03.04.08 - 11:14 am | #

Gort writes:
Hey Ben Dover,
My kid is only getting a 2.0 GPA at college instead of a 4.00. Can I get a 50% reduction in his tuition?
Gort | 03.04.08 - 11:14 am | #

tj & the bear writes:
Property rights are one of the core tenet fallacies of modern capitalism.

Looks like dotcommunist has returned under another name.

tj & the bear | 03.04.08 - 11:15 am | #

crispy&cole writes:
Market does not like today's plan.

What will be tommorow's plan? A pony for everyone??
crispy&cole | Homepage | 03.04.08 - 11:16 am | #

M.Z. Forrest writes:
Yes, there is more hazard. However, the person who goes from 120% LTV to 100% LTV isn't exactly getting a break, particularly if their alternatives are foreclosure or bankruptcy. They are getting their head above water. The odds are still pretty good that they will drown, for those who need to feel better about them facing some consequences.
M.Z. Forrest | Homepage | 03.04.08 - 11:17 am | #

Misean writes:
With B.S.Bernutty popping off like this we know we must be circling the drain.

The complete lack of vision by some one claiming to be an economist of unintended consequences is shocking.

My mind is seizing up just thinking about them.

Time to clear out the safe deposit box.

Cheers,
Misean | 03.04.08 - 11:18 am | #

borkafatty writes:
Market does not like today's plan.

What will be tommorow's plan? A pony for everyone??
---------------------

A free copy of My Pet Goat.
borkafatty | 03.04.08 - 11:18 am | #

Heckie Green writes:
What will be tommorow's plan? A pony for everyone??

Yipee!!!
Heckie Green | 03.04.08 - 11:18 am | #

tj & the bear writes:
Misean,

Time to revisit the local "hardware" store. ;-)

tj & the bear | 03.04.08 - 11:19 am | #

Geoff writes:
I'm with MP. After reading that, I was so stunned, I couldn't even type, let alone try to be funny. This just strikes me as a speech drenched in fear. Friday's employment number is going to be fugly, and Ben already has the numbers. I think he is desperately flailing for a way to stop the downward acceleration he knows is underway.
Geoff | 03.04.08 - 11:19 am | #

Average Joe writes:
Wow, now the appraisers are going to be pressured to come in with low values.

Can you recall a year later if your home value drops more?

Ex: If I adjust from say 700 grand to 500 grand, and then a year later my house is worth 400 grand, can I call for another downward adjustment?
Average Joe | 03.04.08 - 11:19 am | #

bluestatedon writes:
"and who do you think will be responsible for assessing the amount of negative equity in any given property?"

My sister-in-law for some insane reason volunteered for a spot on her township board of assessors in mid-state Michigan, and she says they're completely inundated with demands from homeowners wanting their property taxes immediately reduced due to falling values. What a headache.
bluestatedon | 03.04.08 - 11:20 am | #

borkafatty writes:
OT:PIMCO's Gross buys $1.5 bln of U.S. municipal bonds

http://today.reuters.com/news/ar...pTkr/ GetContent
borkafatty | 03.04.08 - 11:21 am | #

Marcus Aurelius writes:
Hey mp:

I think many do know how bad it is. We're smiling in the face of financial destruction (as any courageous person would). A change in demeanor will not stop the destruction.

______

My solution (and also the reason I should be the next Fed Chairman):

Move the decimal point one space to the left for debt, and one space to the right for income. There. All fixed.

Oh, yeah - I want a pony as my signing bonus. A blue one.
Marcus Aurelius | 03.04.08 - 11:22 am | #

calhousingbear writes:
Guess I better rush out, over pay for a house, stop paying and then call my lender.

Finally, the real American dream!
calhousingbear | 03.04.08 - 11:22 am | #

PitchPole writes:
Wasn't CR going to come out with a "Not the End of the World" post not to long ago? Hello? Anyone?
PitchPole | 03.04.08 - 11:22 am | #

ac writes:

Hey Ben Dover,
My kid is only getting a 2.0 GPA at college instead of a 4.00. Can I get a 50% reduction in his tuition?

Whenever overall average GPA falls below 2.5 Federal Reserve policy mandates increasing the quota of As and Bs to be handed out as well as instituting pay caps for excessively harsh professors.

Ultimately this leads to higher GPAs and, by implication, a more educated population.

ac | 03.04.08 - 11:23 am | #

Law Student writes:
Preemptive cramdown?!?!(lol)

Any CPA's out there? Wouldn't this kind of debt forgiveness still be taxable income for the home owner?

Outside of Bankruptcy it should be, or at a very minimum Congress would have to update the Tax Code, correct?
Law Student | 03.04.08 - 11:24 am | #

tj & the bear writes:
USD-JPY current 102.8650 at Bloomberg. The plunge continues.
tj & the bear | 03.04.08 - 11:24 am | #

Marcus Aurelius writes:
I think we're nearing a "Mission Accomplished" moment (for Grover Norquist).
Marcus Aurelius | 03.04.08 - 11:24 am | #

tj & the bear writes:
Market's bouncing. Is it on the Whitman MBIA investment?
tj & the bear | 03.04.08 - 11:25 am | #

bluestatedon writes:
" GENEVA (Reuters) - General Motors Corp Chief Executive Rick Wagoner said on Tuesday that U.S. auto sales have been weak in the first two months of the year but have not approached the extremes of some forecasts.

"I think it is fair to say that it has been a little better than some of the doomsday people are thinking," Wagoner told reporters.

This is a strong early contender for 2008's "Whistling Past the Graveyard" Award.
bluestatedon | 03.04.08 - 11:25 am | #

Kou Jie writes:
If we don't know

"But where do the banks get the money to do this?"

And

"This demonstrates that the fed has numbers to show things are worse than we already know--and that's not comforting."

Plus guys sayin

"Good, modern capitalism is a bad joke, and needs to be replaced ASAP."

OK, so... dream big

"This is a setup. The next card that will be played will be for the government to pay compensate the banks for a reduction in principal or buy the mortgage and then reduce the principal."

This isn't just flailing or CYA stuff. There has got to be some very alien political zygote in there somewhere.
Kou Jie | 03.04.08 - 11:26 am | #

Nova writes:
Iceman writes:
The fact that BB is suggesting this means that he is realizing just how completely screwed the banking system is. Additionally, it shows just how fearful the Fed is of the waves of foreclosures that are hitting and about to come ashore.

Yes, I think fear is the operative word here. The problem's are:

1. Bush won't push for any of this. He knows BK and, gosh darn it, it isn't all that bad. Heck, it made him a man and stopped his drinking.

2. Who has the staffing, etc., for this proposal? Like Ben, we are laying people off, not hiring dude.

3. "Lets see. If I take the short term hit to profits well then not only do I lose my bonus but maybe my job!" says Mr. CEO. "Oh, crap, thats right I have a duty to my stockholders not to do this. Yipee!"

Note to Ben: Dear sir, I feel your fear and that makes me fearful. I better sit on my gov. check that Shrub is mailing and ... gulp...maybe we should bail on this house.
Nova | 03.04.08 - 11:27 am | #

Sniglet writes:
Ben's suggestions just sound like common sense. If a lender knows that most borrowers with negative equity are going to just walk away, it only makes sense to reduce their principal to keep them in the house. It is far cheaper to reduce the principal than take the huge cost of a foreclosure, flooding the market with properties that are going to fetch pennies on the dollar.
Sniglet | 03.04.08 - 11:28 am | #

Sniglet writes:
Please someone, just explain to me how a lender is better off foreclosing and re-selling the property for (much decreased) market values rather than just reducing the principal for the existing owner?

The lender has to take a loss either way.
Sniglet | 03.04.08 - 11:30 am | #

nades writes:
If a lender knows that most borrowers with negative equity are going to just walk away

But thats an enormous stretch....

(and it wouldnt take most, heck if 20% did it might be the end of debt markets.)
nades | 03.04.08 - 11:30 am | #

Marcus Aurelius writes:
Everybody knew the rules of the game at the beginning. Getting screwed? Too bad. BTW: You won't learn to love it.
Marcus Aurelius | 03.04.08 - 11:32 am | #

mp writes:
There is another option, perhaps less repulsive than the others.

Lenders could extend the term of the loans in order to make them affordable.
mp | 03.04.08 - 11:33 am | #

Gareth G writes:
"This is a setup. The next card that will be played will be for the government to pay compensate the banks for a reduction in principal or buy the mortgage and then reduce the principal."

Nothing, absolutely nothing will be passed by this congress and signed by the moron in the White House this year. Nothing will get done until well into 2009 when it is already too late. This is the way government works.
Gareth G | 03.04.08 - 11:33 am | #

M.Z. Forrest writes:
BTW, the order of preference given was:
1) Increase term.
2) Decrease rate.
3) Reduce principle.

Those hitting step 3 are in pretty rough shape if 1 and 2 aren't going to offer any appreciable good.
M.Z. Forrest | Homepage | 03.04.08 - 11:34 am | #

Ministry of Truth writes:
Misean, I agree it is time to clear out the safe deposit box. BB is offering a best loss mitigation but sadly the banks do not have the capital to perform this action.
Ministry of Truth | 03.04.08 - 11:34 am | #

Eudemon writes:
How much more proof does one need to figure out that globalization is a complete failure?
Eudemon | 03.04.08 - 11:35 am | #

probert writes:
So let me get this: first they randomly create money/credit out of thin air and redirect it into the wrong hands. Now they plan on destroying money/credit out of thin air and redirecting it to the wrong hands.
probert | 03.04.08 - 11:35 am | #

Ed writes:
"Heck, why stop at modest 'principal reduction'?

Why not just forgive ALL debts, suspend contract law, tear up all deeds and re-boot the whole system?"

Well why not institute the old idea from the Hebrew bible of the "Jubilee Year" where every 50 years all debt is cancelled and the slaves are freed?
Lets start today!
Ed | 03.04.08 - 11:36 am | #

Jay writes:
"Ben's suggestions just sound like common sense. If a lender knows that most borrowers with negative equity are going to just walk away, it only makes sense to reduce their principal to keep them in the house. It is far cheaper to reduce the principal than take the huge cost of a foreclosure, flooding the market with properties that are going to fetch pennies on the dollar."

Sniglet: Don't be so myopic. You are missing the PV of the future behavior of home buyers. If everyone that bought in 2005 gets bailed out, when I go to buy my new home in a few years I will be willing to "irrationally" bid up the price, because I too will anticipate being bailed out when the bubble collapses, incurring future losses for the banks.
Jay | 03.04.08 - 11:36 am | #

Gary writes:
Sorry if this was already posted, on Citibank . . . we're gonna need a bigger [life]boat.

http://atrios.blogspot.com/ 2008_...406402706228170
Gary | Homepage | 03.04.08 - 11:36 am | #

Anonymous writes:
"Whenever overall average GPA falls below 2.5 Federal Reserve policy mandates increasing the quota of As and Bs to be handed out as well as instituting pay caps for excessively harsh professors.

Ultimately this leads to higher GPAs and, by implication, a more educated population."

I hate to inform you, but I think this has already happened.
Anonymous | 03.04.08 - 11:39 am | #

Clyde writes:
Remsem's accounting proposal & Kou Jie's intuition of political maneuvering in the background both sound very plausible to me. No doubt we will rehash the S&L goodwill writeoff proposal of yore, but if that is what it takes to get the banking system to take its losses, it is better to have funny accounting than virtual worthless accounting that we have now (HELOCs carried at par, mortgages not written down to their true value, bank refusals to take losses). Something has to be bent to get institutions confident in their counterparties again.

Unfortunately, a number of banks are probably below their minimum capital ratios even with some accounting delay/forgiveness scheme. Ben is calling for triage but the banking industry won't come walking through the emergency room doors.
Clyde | Homepage | 03.04.08 - 11:39 am | #

daredevl07 writes:
I need someone to explain to me how this principal haircut thing doesn't send mortgage rates to the moon, if not Jupiter or Saturn. If I was a mortgage investor, the possibility of a trim like this in the future sure won't motivate me to stump up my cash at 6.5% for 30 years.

Just a thought :)
daredevl07 | 03.04.08 - 11:39 am | #

Shnaps writes:
I really don't think many of you here realize just how dire the situation is. If you did, there wouldn't be so much sarcasm and cute remarks.

I think part of the problem, mp, is that the minute you mention that there are some systemic advantages that could be had by reducing principal (or the OTS notion of bifurcating a upsidedown loan, reamortizing the 'secured' portion and mothballing the 'unsecured' portion as a silent second), you get 1000 commentors here screaming BAILOUT ALERT! MORAL HAZARD ALERT!! OH NO!!NOT NOT NO noes!

It's probably the same people who can't see the upside to globalization.
Shnaps | Homepage | 03.04.08 - 11:39 am | #

w writes:
The government would be better served giving out downpayments to renters who want to buy a house. Give me 100k and I'll buy a 500k house right now.
w | 03.04.08 - 11:41 am | #

M.Z. Forrest writes:
daredvl,

The rates are already going up. They have been going up for 6 months in the face of fed rate cuts. To put it another way, investors can have smaller principal reduction now or they can have a bigger one after foreclosure.
M.Z. Forrest | Homepage | 03.04.08 - 11:41 am | #

Sniglet writes:
nades,

Why do you think it is a "stretch" to assume that most home-owners with negative equity will walk away? I would counter that it is a stretch to assume people with negative equity will stay in their homes. You have very little to lose by leaving your home (except a digned credit rating) and can greatly improve your life-style and finances (i.e. you can rent a comparable home much cheaper).

There is little stigma from losing a home, and there is very little down-side. I can't imagine that any more than a handful of moral die-hards will stay in homes, dutifully paying the mortgage, when they have negative equity.

But just to make this more concrete: assume that the lender has statistics that PROVE the vast majority of people in a given region will just walk if they have negative equity. If the lender is certain of this, then wouldn't they be better off just reducing the principal for all borrowers?
Sniglet | 03.04.08 - 11:42 am | #

Jay writes:
Sniglet:

"I would counter that it is a stretch to assume (rational) people with negative equity will stay in their homes."

I can agree with this statement. But you have to realize that most people are not rational.
Jay | 03.04.08 - 11:44 am | #

Rob Dawg writes:
somebody has to state the beauty of this scheme. might as well be me. By reducing the principal on marginal loans the banks decrease the amount of debt they have outstanding thus improving their reserve ratios. At the same time they reduce the number of questionable loans and increase the number of safe loans on their books. It makes perfect sense in a vacuum.
Rob Dawg | Homepage | 03.04.08 - 11:45 am | #

daredevl07 writes:
M.Z. Forrest

That is my point. If rates are already on the march up before this little haricut plan hit the wire today, what will rates do if this plan is enacted?
daredevl07 | 03.04.08 - 11:45 am | #

girlbear writes:
A new name for BB:

"Bargin Ben" (half off for everyone!)
girlbear | 03.04.08 - 11:46 am | #

Marcus Aurelius writes:
This bit of dialog from Pulp Fiction is appropriate:

Vincent: Jules, if you give that f**kin' nimrod fifteen hundred dollars, I'm gonna shoot him on general principles.
Marcus Aurelius | 03.04.08 - 11:46 am | #

Sniglet writes:
Jay,

Assume for a minute that it was absolutely true that the vast majority of home-owners with negative equity will just walk away. If the lenders have data that shows this to be the case, do you think it is better for the lenders to just reduce the principal of existing borrowers or go through foreclosure?
Sniglet | 03.04.08 - 11:47 am | #

Sniglet writes:
Another way to look at this problem is to consider the case where the borrower is delinquent, yet still has the ability to pay. Clearly the home-owner has just decided to walk away in this situation.

Wouldn't it be in the best interest of the lender to just reduce the loan principal in these situations (i.e. where the borrower clearly has the ability to pay) rather than go through foreclosure?

I just don't see how the lender wins by going through foreclosure.
Sniglet | 03.04.08 - 11:50 am | #

borkafatty writes:
Looks like Gold & Silver did not like Bens commnets.
borkafatty | 03.04.08 - 11:51 am | #

M.Z. Forrest writes:
daredvl,

My guess, start to stabilize. Since we are speaking of impaired assets, anything that reduces the impairment reduces the at-risk ratio. What seems to be the common theme in this thread is that people are acting like we are speaking about mortgages in good standing. The assumption that this will cause other assets to become impaired is just an assumption. Moving from the brink of bankruptcy to having a man's head just above water doesn't strike me as creating added moral hazard. That train has already left the station I'm afraid.
M.Z. Forrest | Homepage | 03.04.08 - 11:52 am | #

homedad43 writes:
mp:

Nice to "hear" you again.

Yes, I do understand how dire the situation is; and thanks to the internet and sites like this, I'm in the unfortunate position of a front row seat for the train wreck.

It's truly frustrating however, to be in the position of watching everything that we've tried to teach our children come to nought. Read the contract. Honor your commitments. Plan your actions based upon the worst case scenario while working to make the best case appear. Give up plasma TVs, turn off the TV and do your homework; postpone the new car and get a used one. There are future needs for the money, even if you can't identify what they are at the moment.

Bernanke is simply the poster child that everyone can throw darts at. And as soon as I read the title of the article, my first response was cynical - gee, now lowball the appraisal. This is where we are.

I do think that there are a lot of people who will suck it up and do what's necessary to correct this. But I also want - demand - quid pro quo. Forgiveness of loan balances? Okay, now you're going to take a hit on your taxes.

TINSTAAFL
homedad43 | 03.04.08 - 11:52 am | #

Alan Greenspend writes:
whoa, somebody is trying to forestall gold's inevitable rise, watch this cliff dive -

http://www.kitco.com/charts/live...s/ livegold.html

the fed didn't raise rates while i was in the bathroom just now did they?
Alan Greenspend | Homepage | 03.04.08 - 11:52 am | #

Pondering the Mess writes:
What a fool!

1) Reward the crooks and morons for buying more house than they can afford. Hey, I live within my means - can I get a credit voucher or something that reduces the price on my next house by $50,000 or something?

2) The sheer arrogance of trying to keep housing sky high in price, yet at the same time trying to lower the loan amount so people might be able to afford to keep the house a bit longer. Come on!? What's next: every house will have a "sales price" and an "equity value" which will be $100,000 more than the sale price, thus basically being free money? Or, are we going to have some insane system where housing will be unaffordable for all, until you prove you're a crook or a dead beat, then the loan balance is reduced?!

3) All these loans were packaged into assorted toxic waste products and sent all over the world: how are we going to figure out who owns what and who decides if the loan value is reduced?

4) Property taxes: So, are we going to have "taxes only go up!" with the assumption of endless Bubble pricing, while at the same time housing prices remain flat to slowly declining, AND loan values are reduced?!

Is this the future: A starter house sells for $350,000 in an area with a median household income of $50,000. The price of the house can be reduced up to $100,000 if you can prove you're a dead-beat, but if you have a decent paying job, you have to pay full price, which is more than you can afford. For tax purposes, the house is valued at $400,000 and will increase 10% per year since "housing only goes up?!"

5) Future loans and contracts: If the rules can change for anyone in the middle of the game, why would anyone lend out money? Don't rates need to go WAY UP at this point to do something about runaway inflation and risky loans? Changing contracts at a whim just locks up the credit market.

Insanity!

Why don't we just let the crooks and fools suffer the results of their decisions, lower the darn housing prices, and then start selling houses to people who can afford them? Yeesh...
Pondering the Mess | 03.04.08 - 11:53 am | #

Allen C writes:
The reality is that the money is gone. Some combination of principle write-down with dual participation in the upside likely makes sense in many cases.

Americans in general have many faults, but we have an excellent track record for ingenuity.
Allen C | 03.04.08 - 11:54 am | #

David in Chicago writes:
Yes, by all means, reduce the principal amount owed. I own three properties, at 60% LTV/6.0% APR, 50%/5.875%, and and 70%/4.625% in descending order of value, and I would absolutely love it if my mortgages were smaller, especially on my home, which is a non-performing asset. In fact, when you get right down to it, why shouldn't I be rewarded for, you know, borrowing responsibly, paying on time, earning a 780 FICO, and negotiating favorable mortgage rates in the first place? What an idiot I was not to overextend myself and get bailed out.
David in Chicago | 03.04.08 - 11:56 am | #

kumar writes:
Hey ,
I am a renter in NJ , i have saved for a decent down payment. I was looking to purchase a house / town house in the last. I knew a bubble was forming because the home appreciation / rent comparison analysis were way out of reality.
There was one house that went up by 15 K from 1993 to 1997, however from 1997 to 2005 it went up by 345K.
Townhomes and SF homes were going up by more than 100 K in the boom years.

I was hoping that the home prices will come back to reality for me to consider buying.
No i hear these proposals by Professor Bernanke, writing down the principal, keep the rates down , so as to keep people who made bad choices remain in their homes.
hey , may be bernanke must consider asking lenders to under-write loans with reduced principal even for newer buyers. Because none of these proposals matter if current buyers stay in their homes and cannot sell the house because there are no new buyers willing to pony up the cash if prices are still high.
If any of these proposals pass , i will continue renting , any of the SF homes, townhouses , i can easily rent for a cost that is approximately 60% of what it takes to own
kumar | 03.04.08 - 11:58 am | #

my poor savings account writes:
I CAN HAZ?!?!?!
my poor savings account | 03.04.08 - 11:59 am | #

Deflationary Jane writes:
What happens in places like sacramento where we are facing outmigration issues coupled with massive overbuiling and speculation? Do the speculators that bought rentals and get principle forgiveness now begin lowering their rental rates even more to attract the few rentors left? What does that do to gross rents calculations across the area? Honestly this is a pandora's box of unintended outcomes.
Deflationary Jane | Homepage | 03.04.08 - 11:59 am | #

Sniglet writes:
David in Chicago,

Yes, the lenders should reduce your loan principals for any of your properties with negative equity. Unfortunately, it seems as if you have too much equity to justify such a reduction.

There is virtually no chance you are going to walk away (i.e. because you have significant equity). However, in situations where the borrower has negative equity, the lender is far better off just reducing the principal rather than having to foreclose (i.e. because very few people with negative equity will be silly enough to keep making payments).
Sniglet | 03.04.08 - 12:00 pm | #

Kirk Spencer writes:
Sniglet,

At this point in time you're wrong. Simple thing to check, really. How many homeowners are believed to be underwater? And of them, how many have walked away?

Now they may become "rational" by your definition, but at this time they're not. They're more interested in keeping that property DESPITE the fact they'd be better off in the short term to walk away and take a lower rent.

Yes, I put rational in quotation marks. Let me examine a few things I can do with my home that I cannot do as a renter. I can choose if I have pets. I can choose to plant a garden. I can set up a workshop for my hobby of choice. I can put ugly lawn ornaments out on display - be they 'permanent' flamingos and gnomes, or be they seasonal lights and turkeys. I get to pick the color of paint I apply.

Oh, and I get someplace that is MINE. I do not have to worry that regardless how diligent I am in making payments, somebody else's decision to sell means I get a 30 day notice - to vacate, or to face a 75% increase in my monthly payment, or... the list goes on, and I've encountered several of the events.

These are not trivial issues. Pricing them is difficult - they're very subjective. But subjective and difficult, they're still rational considerations.
Kirk Spencer | 03.04.08 - 12:01 pm | #

Allen C writes:
"What an idiot I was not to overextend myself and get bailed out."

If you view your mortgage as a call option, you purchased a deep in the money call. Many so called call options were sold at the money with very little premium.
Allen C | 03.04.08 - 12:03 pm | #

bobo writes:
Ben, we can just stop paying the mortgage and it will take the lenders a decade to take the property away. For this reason Ben is urging banks to cooperate because he knows banks cannot keep up in the court system. GREAT DEPRESSION II here we come.
bobo | 03.04.08 - 12:03 pm | #

Sniglet writes:
Kirk,

So what should lenders do if the statistics change, and it verifiably DOES become the norm for borrowers with negative equity to walk away?

If the lender KNOWS there is a 90% chance borrowers with negative equity will default (assume there are statistics proving this for a particular area), is it better to just reduce the principal or go through foreclosure?
Sniglet | 03.04.08 - 12:03 pm | #

plschwartz writes:
Up toward the top Dr.Wu gives two quotes to Ben. Actually the first quote is from the Hanskster
(obviously supplied by the man who talks to God).
Ben's comment seems to be an antidote.
I feel for Ben, as I do for Paulson. The Fed and the Admin. are supposed to work as a team.
Can you imagine what kind of replies Ben gets at meetings with the shrubbery.

Its must be kinda like trying to go hunting with a dog that just lies in the shade and spends hours on end licking his "two best friends"

Moral: The fish stinks from the head

The Fisher King or the Wounded King figures in Arthurian legend .... Versions of his story vary widely, but he is always wounded in the legs or groin, and incapable of moving on his own. When he is injured, his kingdom suffers as he does, his impotence affecting the fertility of the land and reducing it to a barren Wasteland. Little is left for him to do but fish in the river near his castle

or more widely see
From Ritual to Romance by Jessie Weston (available online at http://www.sacred-texts.com/neu/frr/

or see the source
Frazer: the golden bough at Google books for mythology of the wounded king

Like it or no the part in ancient man that brought forth the myths is still alive and well within us.
As in Obamamania
plschwartz | 03.04.08 - 12:05 pm | #

Bill writes:
NPV sounds so easy. But in times like these, what is the correct discount rate! If the lender is on the verge of bankruptcy too, it will take whatever cash it can get.
Bill | 03.04.08 - 12:06 pm | #

mp writes:
There are no "winners" in a foreclosure.

None. Zero. Zip.
mp | 03.04.08 - 12:06 pm | #

Feeding Trolls writes:
Kirk Spencer has never heard of CC&R's?
Feeding Trolls | 03.04.08 - 12:08 pm | #

Ralph Cramdown writes:
Moral hazard for underwater homeowners? I'm not seeing it. The whole point of mortgage contracts spelling out what happens when the borrower stops paying, non-recourse laws and the eradication of debtors' prisons is that in some situations the borrower just has to walk away. The traditional 25% down payment's sole purpose was to make those situations rare and painful. Obviously, increasing LTVs made those situations less rare and less painful. 'Subprime' MEANS more likely to default. The genius of American capitalism has always been, with apologies to F. Scott Fitzgerald, that many lives have post-BK second acts. Lower consequences from BK means more risk taking than in Europe or Japan. But don't say that someone who lost the house, the down payment and the next seven years of FICO is just 'walking away'.

The real moral hazard comes with the split between mortgage servicers and lenders. When they were two guys sitting across from each other in the back room of a bank, it was tough for the servicing department to maximize his own gain at the expense of the bank's as a whole. When they're separate corporations with a few intermediaries to boot, it gets a lot easier.
Ralph Cramdown | 03.04.08 - 12:08 pm | #

borkafatty writes:
Well maybe this is the revolution everyone speaks about...,.lest all stop paying our bills...then what?
borkafatty | 03.04.08 - 12:09 pm | #

Sniglet writes:
mp,

Sure there are "winners" in foreclosure. The borrower who is able to get out from under a large debt and live a better life-style in a cheaper rental is a huge winner. So what if you get a ding on your credit rating? That's not such a big deal.
Sniglet | 03.04.08 - 12:10 pm | #

Kp writes:
Since, it's quite clear that the good will be paying for the mistakes of the bad....why not let us have some pain for our money.

I want to AT LEAST know that the assholes who created this mess will suffer as much as possible. It really will make me feel better as I watch my taxes go through the roof, my wages stagnate and my quality of life diminish right before my eyes for making responsible and non-sociopathic economic choices in the face of the insanity which surrounds me.
Kp | 03.04.08 - 12:11 pm | #

Misean writes:
The markets seem to becoming seriously unglued.

MoT,

Check.

Cheers,
Misean | 03.04.08 - 12:13 pm | #

w writes:
Kirk, Good point but it works both ways,would you put a cost on taxes, maintenance, and the stress of being a few paychecks from losing everything? If you want pets, a garden or custom blinds that can all be found/negotiated. A good renter will be greatly appreciated by a good landlord. Just treat the house as if it were your own.
w | 03.04.08 - 12:13 pm | #

ac writes:

Ooooooooo.... my broker just agreed to cut my margin debt in half!

ac | 03.04.08 - 12:13 pm | #

LTR writes:
Ben has just give you blanket permission to screw your mortgage lender for a major principal reduction.

DO IT NOW. And better add something extra to cover the further falls in sale value which will be coming this year.

Tell them The Fed has said this is The Right Thing To Do.

And while they are at it, they should take 100-200 basis points off your rate too, to help ease the affordability problem.

I'd be on the phone already. Get it down now, avoid the rush.
LTR | 03.04.08 - 12:14 pm | #

remsem writes:
Sniglet writes:
Please someone, just explain to me how a lender is better off foreclosing and re-selling the property for (much decreased) market values rather than just reducing the principal for the existing owner?

The lender has to take a loss either way.
Sniglet | 03.04.08 - 11:30 am | #

lenders mtm their loan portfolios based upon secondary market pricing of certain types of paper. in a foreclosure, lenders look to property value, not market value of the sale of the note. in certain instances, it could be beneficial to foreclose rather than refi or move the note at discount.
remsem | 03.04.08 - 12:14 pm | #

groucho writes:
PPT is scared of the youwalkaway.com movement. They also know that FFR cuts will probably not get passed through to 30 yr mort. The FAT spread for the banks will be offset by continued losses in housing collateral writedowns.

A truly reflexive process that could take a decade or more to complete.

Give homeowners some equity and maybe they will "stay and continue to pay"
groucho | 03.04.08 - 12:14 pm | #

Scooby writes:
Can one of the members "No-Bailout", "principal reduction = moral hazard" persuasion please answer the following in succinct, impartial language and please do your best to avoid political shrillness:

1. Our government purports to be "by the people and for the people", N'Cest Pas? How is foreclosing on millions of people a feasible course of action, presuming that our government and its constituent private institutions/enterprises are actually interested in survival?

2. Please answer MP's question- how are there less losses in selling a gutted REO at a discount?
Scooby | 03.04.08 - 12:15 pm | #

Kirk Spencer writes:
Sniglet - oh, I think it's smart (so to speak) to deal with, but not for the walkaways. Right argument, wrong basis - and the wrong basis will eventually bite you.

The choice isn't do this or deal with walkaways. It's do this or deal with foreclosure procedings. Foreclosures are actually MORE expensive to the banks. Now we both know the walkaway is also a foreclosure, but the walkaway is less likely to contest or strip - at least so far. The walkaway doesn't fight for the extra few months to which he's entitled.

And probably most important, the walkaway doesn't give your bank bad press. Go look at some of the political cartoons from the 1930s - the fat-cat bank taking the family home is a common theme. That common theme was food for a lot of the regulations that came about. Some of the regulations were necessary, but they might not have been as severe had the banks not been so handicapped in the political arena. A major point that's about to come into play again, I think: Credit :: Money as Money :: votes. (Not completely, but closely nonetheless.)
Kirk Spencer | 03.04.08 - 12:15 pm | #

Punch My Ticket writes:
Dawg,

You're usually on target but your reserves versus liabilities for banks remark goes very wide. Yes, banks have to carry reserves against liabilities. Unfortunately, a principal writedown doesn't affect liabilities. It just cuts assets (to the bank, the mortgage is an asset) and reserves.
Punch My Ticket | 03.04.08 - 12:15 pm | #

Average Joe writes:
People, people,

Yes it does make sense for each individual situation to simply reduce the principle rather than go through an expensive forclosure.

But, once you can reduce your principle with a late payment and a phone call, that means banks lose money on EVERY upsidedown loan (hence the phone ringing comment by CR).

So, if the bank loses alot of money on say 3 million home forclosures, but will lose slightly less money for each home but now on 7-8 million mortgages that request a princple-adjustment, is the bank better off?

There are many people who may be upside down but not by much, say 30 grand.....wouldn't you make a call for 30 grand?

The complications of this are tremendous.

So do you go out a take out a huge second on your house, hide the cash, and then ask for a cram-down....Free Money! Sure a credit hit but won't need to borrow money for a while now!
Average Joe | 03.04.08 - 12:16 pm | #

sdtfs writes:
Moral Hazard

Everybody just stop paying. We're too big to fail. If they can't foreclose on less than 5 or 7 per cent, how about everyone? We can all live rent free. Forgiving principle on one or two might be possible, a significant fraction isn't opening a can of worms, it's pulling the pin on a grenade.
sdtfs | 03.04.08 - 12:16 pm | #

12th Percentile writes:

Hey Ben Dover,
My kid is only getting a 2.0 GPA at college instead of a 4.00. Can I get a 50% reduction in his tuition?

Whenever overall average GPA falls below 2.5 Federal Reserve policy mandates increasing the quota of As and Bs to be handed out as well as instituting pay caps for excessively harsh professors.

Ultimately this leads to higher GPAs and, by implication, a more educated population.

Certain universities had policies where everyone got A's and B's. The students were happy, everyone seemed smarter and the universities could bask in their greatness. Princeton was the leader in this strategy. I wonder if Ben, when he headed up the department at Princeton, came up with that policy, which i believe is known as "grade inflation".
12th Percentile | 03.04.08 - 12:17 pm | #

Ziggurat writes:
Main Stream Media:

“Liquidate labor, liquidate stocks, liquidate farmers, liquidate housing.”

http://www.newyorker.com/talk/ fi...talk_surowiecki
Ziggurat | 03.04.08 - 12:17 pm | #

Francois writes:
"Of course, if it becomes common for lenders to reduce principal, their phones will be ringing off the hook!"

Of course, if it becomes common for lenders to face foreclosures, their financial health will fall off a cliff.

Lenders bears no sma