What a surprise. The new edicts concerning mortgages that are being issued from the White House have some of the largest United States banks developing a back bone. Ever since they were cajoled into taking the TARP money, or in some instances needed it to survive, the Federal government has been telling the banks what to do.
While some may like this, for example the press has done a great job vilifying the banks, this is not a healthy place for the them to be in. Government officials are not worried about profits, they are worried about taking care of their constituents needs. Or otherwise, getting re-elected.
But the banks look like they have had enough. The new requests from the Federal governments are so onerous that they would put the banks out of business if they followed through. The government has demanded banks rework mortgages to such a large degree that they would destroy their bottom lines and create enough breaches to the Law of Unintended Consequences to permanently change banking as we know it.
In written testimony prepared for a hearing in Washington Tuesday of the House Financial Services Committee, some of the nation’s top mortgage lenders warned of the risks of relying heavily on forgiving principal as a means of averting foreclosures and argued for concentrating mainly on other methods, such as reducing interest rates.
That may set up a clash with Rep. Barney Frank, chairman of the committee, and other lawmakers eager for more aggressive action to prevent foreclosures. In a letter last month to four big banks, Rep. Frank, a Massachusetts Democrat, argued that “to save homes on a large scale, we must move past temporary modifications in interest rates or terms and focus on permanent principal reductions that result in truly sustainable mortgages.” via WSJ
11 million households are underwater. If all of these homes were able to rework their mortgages it would cost the financial institutions 900 billion dollars.
It would be great for the foreclosure overhang to just go away. Let all the people who made bad decisions have them fixed and those that got pinched by bad luck be made whole. This maternal view by government will unhinge our financial establishment.
And that is not a good thing.
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{ 2 comments… read them below or add one }
I think you're being a little too broad on this point here. I can understand the basics: the idea that principle reduction is a catch-all solution is simply not true, but neither is interest reduction.
You said it pretty clearly yourself. "Government officials are not worried about profits, they are worried about taking care of their constituents [sic] needs." Their constituents need to be in houses and not struggling to make their mortgage payments so that they can spend money on other things. If fear of losing their jobs gets them to act in my interest, then I consider that a good thing.
That being said, many banks have voluntarily started doing this as a way to avoid strategic defaults (http://online.wsj.com/article/SB10001424052748703312504575141763259183050.html?). Yes, the financial institutions could lose up to 900 billion if they had to reduce the principal on all of those homes. However, that sort of doomsday scenario is remarkably unlikely. Rather, we'll probably see the White House encouraging other banks to follow Bank of America's example, hoping getting ones like Chase to jump on board with Wells Fargo and even Citigroup.
this is a good thing. A lot of Retired Citizens that thought they were in VERY SAFE and VERY LOW RISK Iinvestments ARE GETTING HURT with the U.S. Government BREAKING CONTRACTS which is illegal to help unions and those that were irresponsible either make or save money.
But those that Saved and Invested, well the U.S. Government is throwing them under the Bus.
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