Ben Bernanke addressed the Independent Community Bankers Conference in Orlando yesterday and addressed ideas he has on fixing the mortgage mess. Instead of trying to work problem borrowers on the interest side of the loan, Bernanke is looking to have a straight principal reduction of troubled loans.

This makes sense in a convoluted way.

• The homes are worth less as property values go down.
• The banks could not sell them if they were foreclosed upon for the loan amounts.
• More foreclosures in an area put even more pressure on housing costs.  

But the question that bothers me is who gets the mortgage relief and who decides it? The power in the equation can easily be misapplied and spotty results could lead to a huge legal problem in these litigious times.

Here is an except of the speech, if you want to read it in full, there is a link at the bottom of the post.

Reducing the rate of preventable foreclosures would promote economic stability for households, neighborhoods, and the nation as a whole. Although lenders and servicers have scaled up their efforts and adopted a wider variety of loss-mitigation techniques, more can, and should, be done. The fact that many troubled borrowers have little or no equity suggests that greater use of principal writedowns or short payoffs, perhaps with shared appreciation features, would be in the best interest of both borrowers and lenders. This approach would be facilitated by allowing the FHA the flexibility to offer refinancing products to more borrowers.
Ultimately, though, real relief for the mortgage market requires stabilization, and then recovery, in the nation’s housing sector. Modernization of the FHA would be of help on this front as well. I am sure that the FHA and the Department of Housing and Urban Development, given the appropriate powers by the Congress, will make every effort to expand their operations and to help improve the functioning of the market for home-purchase mortgages. For community bankers, FHA modernization and expansion would provide an important opportunity–of which I urge you to take advantage–to better serve your customers and community.

Read the rest of the speech at Reuters.

Related posts:

1. Mortgage Bankers Association Propose Dismantling of Freddie, Fannie
2. Treasury Department Calls Meeting With 25 Largest Mortgage Lenders
3. Lenders Buried Under Load of Mortgage Re-Works
4. Interest Rates Rising – Mortgage Activity Slows Down 16 Percent
5. Mortgage Lending Drops as Interest Rates Rise – Surprised