Bernanke to banks: Get real, reduce loan amounts

Good morning. Before you tee him up like a Titleist, give the Fed chairman some credit this morning: he acknowledged the elephant in the room, the one no one else in Washington wants to talk about.  Bush, Obama, Clinton, Paulson -- none of them has faced the facts on this one.

The elephant is this: aided by incompetent lenders, many hundreds of thousands of recent homebuyers borrowed too much, paid too much for their homes, and can't possibly pay back the amount they owe. It doesn't matter if you freeze or reduce the interest rate, or lengthen the mortgage to 40 or 50 years, they can't pay the money back. If banks really want to stop the foreclosure train, Bernanke said today, it makes sense for them to take a deep breath and to reduce the principal on some of these loans.

The AP: "The Federal Reserve chairman, Ben S. Bernanke, called Tuesday for additional action to prevent more distressed homeowners from falling into foreclosure. ... One of the suggestions Mr. Bernanke made was for mortgage and other financial companies to reduce the amount of the loan to provide relief to a struggling owner. 'Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure,' Mr. Bernanke said."

This is a tough one, bound to be unpopular. Banks and lenders, who presumably know whether this is a smart course of action, appear to be hoping for the tooth fairy instead -- a bailout that won't hurt as much as write-downs would.

Write-downs would also infuriate some of the neighbors -- why do the Wilsons get a special break so they only have to pay $350,000 for their house, but we still have to pay $500,000 for an identical house?  E-mailer JG writes, "This is the most sickening suggestion I've ever heard.  If I understand him, he is saying 'Go ahead and buy something you can't afford and the person who lent you money to buy it should just cut the amount you owe.' ...  Why work hard to achieve anything in this country?  The greedy and stupid people will be rewarded, and the hard-working people that save and live within their means will be punished."

Bernanke knows this kind of backlash is coming: "... we want to help borrowers in trouble, but we do not want borrowers who have avoided problems through responsible financial management to feel that they are being unfairly penalized."

Read the whole speech here and let me know your thoughts. E-mail story tips to peter.viles@latimes.com.
Photo Credit: Bloomberg News.

Comments

[sick of fixin fools]

How to fix...everybody, not just some, but everybodys loans arereduced by.oh lets say 30%. Then all interest rates are max at 5%. That would be fair to the rest of us who were not smart enough to buy something we cannot afford then actually be responsible enough to pay back the loan. I owe 300k, my home is worth 250k, my last refi to 300k was with an apparasil for 400k. I did a refi with a 75% LTV. Let me go back in time and I will gladly take the full refi at 400k now that I know by biting off more than I can chew I will be rewarded for that.

[erinkeenan]

i personally have nothing but sympathy for ben bernanke. he has been thrust into a ginormous mess that was most definitely not of his own making. clearly the fed has realized that they don't have the ammo to do anything to stop what's going on. obviously this is a very troubling idea, principle reduction, but the fact is for the people who bought responsibly, they are going to have to accept that values have to come down and better sooner than later. the market is going to remain frozen if prices don't fall more than they have, and they have not realigned yet with affordability. what's the point of raising the jumbo loan limit if no one's income qualifies for a jumbo? how many people make enough to reasonably qualify for a jumbo?
ok, now im wandering all over the map.
all i say is, give ben a break! looking for someone to blame - i say greenspan's your guy.

[Hula Girl]

'Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure,' Mr. Bernanke said."

Duh. Now I get it: Restore equity, use home as ATM machine again, spend equity on stuff to keep the economy going, lose equity, have Feds restore equity again.

Repeat until everyone is in delinquency and foreclosure. Then invest in storage units - America's new second home.

For this I pay taxes?!!

[arroyogrande]

"why do the Wilsons get a special break so they only have to pay $350,000 for their house, but we still have to pay $500,000 for an identical house?"

Even better...you and your neighbor buy identical houses in 2003, say for $400,000. You get either an ARM, or a fixed rate loan that you can afford.

Your neighbor, on the other hand, gets an Option-ARM, and only pays half of what you do each month, the remainder getting added to the amount he owes on the house. He spends the amount he would be paying on vacations, dinners out, and expensive car payments. Additionally, he incrementally withdraws "equity" over those four years, using *that* money to pay for more vacations, jet skis, yet another new car, dinners out, cosmetic surgery, and an "investment" in a vacation condo. He ends up owing $600,000 when all is said and done.

Prices drop, houses are selling for $400,000 again, and he appears to be "underwater" by $200,000.

Foolish you. He gets his debt forgiven down to $400,000 again...almost the same as you, who had been living within your means, and not taking on $200,000 in additional, consumer spending related debt.

Next time, you know what you should do. Living frugally and responsibly is for chumps.

- arroyogrande

[CD]

I agree with erinkeenan , Greenspan put us in this mess.
Anyway, nice try Bernanke ,but , if it would happen there would be a revolution in this country, I'll stop paying my credit cards asking for a discount and would asked for a reduction on my car loan. MORAL HAZARD. How many times can we say it. Why don't we teach our kids in school, behave badly and you will be rewarded hundred times fold.
Let it rip, it's over.....I hope you guys are FDIC insured and are out of the financial stock.

[AmericansforPersonalResponsibilty4Obama]

Why work hard to achieve anything in this country?

Someone actually asked that? You mean, there is someone out there that hasn't given up on that notion completely by now????

There is still hope.

[sid]

I like John Reich's(?) idea where the lenders refi/reduce the monthly and the lenders become partners with the homeowners. If the house sells for more than the principle in the future can be used to pay the lender's loss.

In the meantime, the lender gets something every month from the homeowner and deduct the loss.

The homeowner gets to stay in his house.

I imagine there's a lot of details to work out and this will only work if the homeowner is truly committed to living in his house.

[la voce bella]

I used to think Ben Bernanke knew his stuff. I hope this is just election year rhetoric coming from him because if banks do this ridiculous thing, I'll be priced out of the market yet again because home prices will not be declining as they should be. Isn't this supposed to be a free market that creates the incentives for worthy borrowers to invest and LIVE IN their homes?

He should be working on strengthenng the dollar and keep his mitts off the housing market. I am SO depressed!!

[Cal]

Bondholders can hedge, homeowners cant. I could buy insurance on my mortgage portfolio against defaults. I cant buy insurance against me buying a home I cant afford.

Many of the bonds have hedged, they will get paid regardless, I dont think they are that motivated to reduce principal when all it will do is lose them money.

[the problemwithcaring]

On CNBC this morning, someone asked a question about the "fairness" of a proposal like this and one of the panelists actually said something to the effect that - capitalist markets have little to do with "fairness."

I thought that a novel take on the current business environment. In the modern global financial world order, we're all a third world market.

[BottomFisher]

Uncle Ben translation: Not my job mon. IMO somebody has to take the losses from overpaying for homes in this classic bubble. Lets see, will it be home A the home buyers or B the lenders or C the taxpayers......we all know where A and B want it to fall on...if they can't pull that off over our dead taxpayers bodies then A and B will have to duke it out, as per their written legal binding contracts, until its finally over and affordable prices become reality. Then it will be a normal market again. There...not so complicated after all. Class dismissed.

[Daniel]

Why would banks want to do this? It is taking a certain loss against a possible loss. If the banks hang in there they will have a certain number of foreclosures and delinquent borrowers, okay, but if they offer an immediate 25% or 30% principal forgiveness plan, could that not be worse than just waiting to see who is going to foreclose? The eventual foreclosure numbers might not be eqivelent to 30% of their total paper.

I'm not supereconomist, but it seems to me if I was a bank and I had ten guys that owed me 10 bucks, I would rather take the risk that one or two of them might default than just immediately offer them all 2 bucks back.

D

[Tombstone Realty]

I'm not so sympathetic to Bernanke, only because he's made a couple of glaring mistakes - first, dismissing this whole situation as being "subprime" only. He was either lying, or just made that comment up without looking at the data. Now a year later, he's talking about bank failures.

There's also a consistent denial at the Fed as to what counts towards inflationary pressure. Fuel powers *everything* in this market, and any price rise in fuel naturally spills into everything else. They are idiots for excluding it.

Maybe he thought just adding a bit of paint to the place would make the position good enough to flip to someone else once the Bush Administration was over. But while Greenspan is mostly to blame, the rest of the Federal Reserve can't get away scott free.

Neither can Congress. It's insulting to my intelligence that the Banking Committee complains to the fed chairs about their lax regulations, when Congress wasn't making sure the fed chairs were doing their job.

Wholesale dishonesty and corruption, from top to bottom. Whether you were a home 'buyer', an agent, a broker, or a bank CEO.

All we're doing is thrashing around in a web, and waking up Mr. Spider for dinner.

[Chris Young]

This is what you call "perverse economics". What ever happened to Personal Accountability?

Who is going to bail out the banks? Who will "write" their loan down?

The buck has to stop somewhere. Let it fall on those who are responsible for this mess. Otherwise - we are creating a horrifying situation where there is no Personal Accountability for one's actions.

[Fourth Generation]

The problem of over valuation of loans for home mortgages is the one that exacerbated the bubble in housing prices. The write down suggested by Bernanke is DOA because the investors in Wall Street and the banks will never suck up the loss although they should. Also this will also reward stupid and incompetent lenders and borrowers. But willingly or not housing prices must go down to pre-bubble values (may be 2000 values) to have a correction that will place houses within the median country income.

[waitingitout]

I'll give Bernanke this much - that he's willing to even float an unpopular idea to the banking industry shows an independent streak I didn't think he had.

Not that I'm crazy about the idea. At best it's 1/2 right (good for irresponsible borrowers, bad for irresponsible lenders). And how much do the banks write down? $50k? $100k?

As long as we're talking writedowns, how about an across-the-board writedown to current appraisal values. And if you STILL can't afford the home on a 30 year fixed, then you have no business being rescued.

Sorry folks, this is AOS. All Options Suck.

[gc67]

This is absolutely the most disgusting suggestion I've heard yet and lets not kid ourselves here - it is not the homeowners that the Fed cares about, it is the BANKS. If the banks agree to this ridiculous proposition and write down the principal balance on these loans, at least they have a shot at keeping borrowers in their houses. That helps avoid the expense of foreclosing and then reselling the house months or years later for pennies on the dollar.
My husband and I went through this back in the early 90's when our house lost half of its value and we couldn't sell it even then. We gritted our teeth, waited it out and my husband delivered pizzas at night so that we could continue to make our mortgage payments. When we were finally above water again we sold and we swore to ourselves that never again would we borrow more money than we could afford to repay. Since that time we have watched our tiny little 1,000 sq ft condo in Signal Hill TRIPLE in selling price - from the mid $100's to over $350K. We knew then that there was a serious sickness going on in this country and it had to end sometime. We rented and waited it out. So now judgement day is here and rather than force the banks AND their customers to DEAL WITH the consequences of their reckless, thoughtless actions, our REPUBLICAN president and his appointed Fed chairman propose a bailout. My taxes are now going to pay for another idiot's cars, vacations, jewelry and whatever else these people bought with their false equity. I would not allow my own CHILD to get away with ducking his responsibilities like this and yet our PRESIDENT thinks that the banks deserve a break. Yeah, OK, how about all those mortgage brokers give back all those BONUSES that they received over the years for these bad loans, take that money and use it to write down the loans. Then, at least, Mr. and Mrs. Fiscally Responsible will not have to pay for other people's STUPIDITY.

[Paul D'Aula]

Actually, "sick of fixin fools" is perfectly on track. By reducing EVERYONE's debt by 30% and taking the writedowns, the banks continue doing business with most of the current crop of customers. The first bank (i.e. Citigroup) that goes bust causes a run on all of them, so why not? That would free up the american consumer and the give everyone wiggle room to spend again. Sure, the market caps of the big banks would be lower - some of them will be owned by Arab and Chinese entities - but hey, it beats the heck out of a $70 loaf of bread.

[GDC]

The more I hear this guy speak, the more I think he's in way over his head. Intead of cutting interest rates to spur more lending activity, he should be encouraging tighter lending standards. There has to be consolidation and failures for banks to get back to equilibrium - there simply isn't the demand to keep some of these fringe banks in business right now. Same with consumers; they are tired of purchasing and tired of being in debt. Stop throwing fuel to the fire.

The faster banks start tightening their belts, insist on 20% down, and insist on fair appraisals for loans, the faster they will reach profitability down the road.

As for principal reduction, Bernake is proving that he has no clue and is out of touch with what's going on (just like Bush). The people that can't pay their loans are DEADBEATS. They never should have been given credit and allowed to buy homes in the first place! They have bad credit scores, stupidly chose option ARMs, and these people generally have no remorse about defaulting.

It's like loaning money to a deadbeat relative; assume that the money will never be paid back because they will always come up with some excuse why they can't. The banks know this. Boy are they in trouble.

[Hugo Dominguez]

These people who find themselves in this mortgage mess are hard working people who tried a chance at the American dream because *banks* were permitting it, promising greater equity growth and ability to refinance after to two years. Hey who wouldn't take that shot. I did! My lender stayed the interest adjustment and I'm happily working my butt off making payments, no foreclosure, no abandoned property. Works great. Except on thing: The house value dropped 125K!. Not my fault. Now what do I do. I don't think I will be able to regain that equity in my life time. Does it make sense to continue to pay this mortgage? Nope. It's cheaper to rent. Unless the lender is willing to reduce the loan amount, I am going to voluntarily foreclose, even though I have the ability to pay the mortgage.

[Lisa]

I'm torn, because on the one hand, I can see how the factions benefiting most from this whole thing are the banks who are making loads of interest from higher priced homes and higher interest rates, so I feel like, yeah they should take a hit. After all, they were the ones who approved these people to buy the homes.

BUT coming from the standpoint of someone who didn't buy something I couldn't afford, that would be irksome because, hey, where's MY free money. Feh.

[CK]

Why doesn't him suggest banks to forgive all loan? That would make him the most welcomed guest in my house as long as I live.

[marty]

Why is the person who took out the loan for which they can not make the payments allowed a pass? Where was the problem: dreaming beyond their means, or not reading the terms of the loan? If they weren't clear about the loan why didn't they ask? Is not understanding the terms of your loan justification for not paying it? How many people honestly thought a market, any market, would forever rise? I find it hard to swallow that everyone who can't pay their loan is a victim of illegal loan procedures. Some maybe, and those criminals should be prosecuted, but ALL? There are those of us out here who were skeptical about the hugely inflated housing prices in this city and did not take out enormous loans that we weren't sure we could pay. Foreclosures are ugly, and tax revenues are down. I don't want my hard earned tax money to go to rectifying other's folly. Maybe the problem is not teaching our children the fundamentals of economics in school so they can avoid this type of massive folly.

[Are You Kidding Me?]

wow! what do i say to my wife and family now? for the past 4 years, i told them that renting is better than jumping into the housing market because people were acting irrationally, that eventually all the yahoos who buy and spend money like there is no tomorrow will go belly up and we can then pick a nice house that would be within our means. "i know," i told them. i am an econ major. i read the wsj. i read the business section of the la times. i followed the housing market on zip realty. heck, even the gov't tells me that i am in the top 1% income earner--albeit at the bottom of the top 1% because i could not afford to put my family in a house in the la market.

now as i am about to enter the market to buy a home for my growing family, our government (my own damn money) is going to bail out those yahoos?! i don't think so.

the market needs to correct itself and the sooner we stop interfering, the sooner the correction will occur. bailing out the yahoos, either through refi, principle reductions, gov't bailouts, etc., will not solve the problem. housing prices in certain markets are way too high and need to come down. foreclosures will drive prices down. foreclosures will be reflected in appraisals....principle reductions will NOT show up in any appraisals.

[fpinpdx]

Long-time reader, first-time poster here. Allow me to echo sentiments that have already been expressed previously, numerous times. I need to vent. Because I am fu&#ing pissed. This huge ball of crap rolling down hill seems to be headed in a direction where it seems ultimately I will lose out, having been relatively conservative and responsible with my house financing over the years. I bought my first house 12 years ago; last year I did what more or less amounted to a lateral move, selling my house and buying in a different part of town. I put all of the proceeds from the sale of the old house into the purchase of the new house; my new loan was at about 50% LTV (naturally the mortgage broker tried to convince me into putting less down). I've always had 30 or 15 yr fixed mortgages; the 3 times I refied my old home's mortgage, I never took money out. I've never had an equity line of credit. And, from savings and a one-time financial windfall a few years ago, I built a small cabin on a piece of land I bought. There is no mortgage on this vacation home. Have the values of my properties gone down since the peak? Yes, of course. Am I able to continue to make my mortgage payments. Yes. Is my lender in jeopardy of losing money on my loan? No. Am I in need of a bailout? No. Will other irrisponsible idiots get a bailout, on their lost equity? Probably. Am I schmuck? TBD.

[150 multiple choice questions]

Well, the Wilson's house is going to be worth 250k no matter what!.. Now, whether the Wilson's are still in it paying on 350k, or 250k is really immaterial. What BB is touching on is EXACTLY right. TRYING TO STALL FORECLOSURES IS A WASTE OF TIME. All this idea he's floating is trying to do is eliminate the wasteful and time consuming foreclosure process.

And what no one (I don't think) is pointing out is that if someone is 30% or 50% underwater in their house THEY SHOULD WANT TO GET FORECLOSED ON! (then buy the house back for the lesser amount!)

[jaded]

hey, if I run out and buy a $75,000 BMW and then I decide I can't pay for it, will BMW Finance reduce my loan down to $25,000? That way, I can keep my car and BMW still gets loan payments. That works, right?

[rodney]

We the tax payers will ultimately be on the hook financially for this enormous debacle. One way, or the other.

It's not in anyone's interest to have mass foreclosures, from coast to coast. Principle reduction is the only realistic solution. Is this solution palatable? Of course not. Regardless, the sour grapes will be dispensed quite liberally.

The scores of responsible and sensible homeowners will simply have to take pride and satisfaction from having done things correctly and responsibly. The piece of mind that results from having lived within your means will have to suffice as its own reward. A few generations ago, this was all the benefit an individual would have ever needed.

As for the banks and lenders, they certainly helped create this monster. It stands to reason they should pick up the better part of the tab. Lending people more money than they could ever repay helped push home prices ever upward. Thusly, people had to borrow ever larger amounts . . . in a relentlessly viscous circle.

Greed is certainly at the heart of the matter. But again, the financial institutions led the charge on that front as well.

[harvey]

It seems like Bernake is trying to avoid a huge real estate crash. Those who "bought responsibly" can either see their debt strapped neighbor do 1 of 2 things

1) Walk away from his or her home and then watch that home, right next door, be short sold for 20%-40% below market value and pummel the value of your particular neighborhood..

2) Have that same neighbor renegotiate his loan and stay put thus SUPPORTING your neighborhods value.

I think Bernake is on to something here and that some people need to wake up and smell the economic coffee.

-Harvey

[Walter G]

Hey, I've paid my mortgage on time for 10 years. Can I apply for a "I'm a nice guy" principal reduction?

Inflation is low, too. Yeah, suuuuuurrreee, Benny boy.

[Mike P.]

The problem with this proposal is, which price do you pick for the new principal? What if the loan isn't held by a lendor, but by investors (in CDOs)? What if prices keep falling? Do you do another round of reductions? It sounds more like a band-aid... when the patient requires major surgery.

It's a bad plan, because it infuriates (and punishes) those who didn't give in to the mania.

[Pauli]

I see. My rent is double what it should be because it too rose artificially in lockstep with the phony "rising property values." The Fed's monkeying with interest rates has dropped the rate on my savings CDs below inflation. Now I'm supposed to bail out deadbeat wannabes too? I don't think so. If the pseudo-"homeowners" get their mortgage liability reduced, then I should only pay half the monthy installments on my lease and still get to stay in my apartment.

[J. Turner]

I have watched the prices of homes go off the charts...they have shows on TV now that "tell" people how much the piece of garbage home they live in is worth or would be worth if they put some paint on it....people would get with the greed program and actually sell for that price...to people who are dumb enough to think that this manufactured gravy train will continue....i watched in amazement...it is a crime perptrated on those of us with a "normal" sense of fiarness and know that ill gotten gains will be paid for somehow....and as usual they are going to ask those of us who showed good judgement and did not take out the "manufactured equity" that the real estate and home builders decided was market value......we had lots of opportunity to refinance.....we soon realized that this was just predatory lending at its finest....we have good credit but they would could not ever get the money we actually needed to fix the minor problems and update appliances because the lenders wanted us to take more....and they wanted to roll every other dime of debt into the same loan....guess being older does help in some situations...we knew what we could afford and told them no thanks...especially when they would not give us a fixed rate....hate to tell you how many lenders i hung up on.....bail out the lenders....no way....help those who lost the homes they could not afford in the first place? please....you live and learn and "ya pays for your mistakes" we gave up lots of things to keep our home and we are fine...i never felt like i needed all of the "stuff" or new stuff every time...we have a nice home but it is not fancy nor is there many "new" things in it... "garage sales are us" we are "trapped in paradise" but thats ok...we feel lucky and realize we fought the need for greed and kept our feet on the ground and this leaky roof over our heads.....

[nothappy]

maybe the real estate agents who sold the over priced homes in the first place should kick back their commissions into a fund to support this...while we're at it, maybe the mortgage brokers, banks, wall street firms, etc, can kick back the huge profits they made off the loans into the same fund...

[susan]

I am not, by any means, a financial genius. My husband doesn't work in finance or banking. YET we both knew that the Option ARM the mortgage banker was offering us was ridiculous. Even in the best of circumstances with steady raises we would never be able to make the payments once the interest reset. The killer is that the loan amount was for $450k - which would still not buy us even a fixer upper in our area. So we walked out of the office and spent the next two years watching the market continue to skyrocket. I guess we should have just taken the stupid loan because making a prudent decision is obviously not going to pay off.

[x32792]

Did Bobo Bernanke explain how lack of Federal oversight allowed the subprime mess to happen? Or how the Federal Government printing money like a Banana Republic has devalued our currency by 50%? Hey folks, gas and grocery have not gone up...it's the dollar which has gone down due to irresponsible spending habits of Bush and Congress. Our own government is the most serious and dangerous threat to our Nation.

[gimmeabreak]

Hugo wrote: "These people who find themselves in this mortgage mess are hard working people..."

Save the violin. I have sat back and watched in amazement at how many friends and neighbors have irresponsibly borrowed way more than they could afford simply to live a high-flying lifestyle. I know a cop who has 2 vacation homes and a Hummer, a supercuts hairdresser who owns an apartment complex. They knew this was all beyond their means, AND THEY DIDN'T CARE because they were greedy. They lived the high life while I have saved and pinched every penny, knowing the prices had to come down to realistic levels someday. If you thought prices would go up to 20% a year forever you are a moron and don't deserve to be bailed out. Hey Bernanke- how about reducing my 100k law school loans or the 40k I borrowed from Chevy for my Tahoe? Neither one was worth the price I paid.

[LA-Architect]

The more I see Ben Bernanke in action, the more convinced I am that he needed to stay in Academia land. He has no clue as to what he is doing. You cannot manipulate the markets with a heavy hand. The bottom line, as we in the Blogoshpere know, prices in L.A. and other frothy markets bear no relation to the income levels. The responsible people who chose not to get a ridiculous NINJA or Pay option loan sat out on the sidelines waiting for the train wreck to happen. It happened, yet the government keeps prolonging the whole correction. Let the prices reduce to pre-2003 levels (I'm being generous there).

By seriously proposing a principal reduction on loans for those who are underwater makes no sense. The majority of these people used their house as an ATM, bought expensive cars, cosmetic procedures and other discretionary items.

The Bush Administration in its entirety needs to be purged and put behind bars. And, that includes Greenspan who laid the framework for this mess.

[DenisL]

As long as it is not government money that is paying the principle on these upside down mortgages, it does make sense for the banks on their own to not foreclose and then sell the house for what the current resident is willing to pay. They would be smart to do as Bernanke suggests. Of course, I am very curious who will actually make the loan on a house in a market where the prices are declining.
Interesting times. This is a Federal Reserve created mess. I do not want government money (my money and those of other taxpayers) being used to bail out the Fed. How about we quit lowering interest rates, save the dollar from collapse through impending hyperinflation, and let the free market sort this out.
Oh that's right!! We do not believe in a free market in the USA any more. We are doomed.
Let the bank take the damn house after you get a few months FREE rent out of it and use the money to buy gold to protect yourself against inflation. Paying for an upside down house is stupid when there is no way that you will get your money back and it is cheaper to rent.

I

[tabutl]

I think unless you are one of the people in the situation, you can't understand the severity of this problem. My husband and I bought a house 1.5 years ago. It was about $150K more than we planned on spending but our mortgage rep assured us that this loan would make the home affordable and we'd be able to pay the loan off in 23 years. Everything he told us was untrue. We now have accrued over $20K in deferred interest and are scrambling to sell our house to avoid an upside down situation. No one ever buys a house planning to be over their head or house poor. If people do, then borrows were not the only victims in the mortgage crisis.

[Michael]

Unbelievable ... the same Fed that insisted throughout the rise of the housing bubble that the Fed will not try and control asset prices ... is now trying to control asset prices. Anything to excuse the frantic printing of money to solve every economic woe, eh?

At any rate, it's not like Bernanke's statements mean much in the end. The banks will treat loans the way they always do, pricing them out for risk, reducing payments where it benefits them, and sticking with high payments where it benefits them. They will, and should, try to maximize their income on each loan. What will create real problems, and chaos, is if the Federal gov't tries to control the private market by enforcing loan reductions. I very much doubt we will see that, however.

[Bailey Hankins]

Once the elections are over, the taxpayers will foot the bill, just like when Chimp's brother Neal ripped off taxpayers for the millions in write-off loans he took at Silverado Savings & Loan.

All if this is just distration until the politicians are safely elected and there is time for the electorate to forget.

[TrojanDLA]

LET THE MARKET CORRECT ITSELF. Yes there will be pain, but the pain is unavoidable. There is no magic cure or bailout that will help in the long run. All the suggestions by the banks, feds and democrats have been band-aids that do NOTHING more than protract the correction. This correction is healthy and if people need to move into apartments, then NO PROBLEM. As a matter of fact, if people save money by paying rent instead of a mortgage, they'd have more discretionary income to buy products and services.

[vultur]

Man this is a bitter group!

BB is just trying to get the banks to take their medicine. Why should the banks foreclose and sell their properties for 60 cents on the dollar when they can write-off the 40 cent loss now and activate a new loan at a manageable rate?

Either way prices are coming down because borrowers are just not able to service the debt on the existing loans. Take your hostility out of the equation for a second- can't you see the logic?

I get it- you guys thinks it rewards irresponsible borrowers right? Where's the reward in going into default on a mortgage and having your life months away from foreclosure and your credit destroyed?

The most valuable thing that you have in life is your good name. Even this group must acknowledge how much farther ahead you are in life by not behaving recklessly with your finances.

And to the renters, this will surely cause an immediate drop in housing prices and provide you with a quicker entry point into the market although possibly not at as deep a discount as you would have hoped.

Regardless, the alternative is severe economic weakness to the point where unemployment skyrockets and everybody (yes including you renters) loses big time.

Is that your preference?

[Steve]

This is one more step toward a bail out. It may not be a principal reduction, yet it will be close. This is a election year and the Texas Moron has to do something to save his presidency at 25% approval rating. The Fed and local govt can not let home values drop simply because of the local property tax base. Again, you rent and save you are chump, you leverage as much as you can you win, it is that simple.

[college student]

this is sooooo.. f****d up!

[cliff4cal]

Let's see... speculators and naive buyers pay more for a house than it's worth...lie about their income...get a loan from mortgage brokers who care only about his/her commission...get funded by a bank who doesn't verify the buyers information and pressures the appraiser to approve the inflated value and immediately sells it to Wall Street...which in turn has a deal with the bond raters to give a AAA rating to worthless securities and quickly sells them (for a huge fee) to pension funds, hedge funds and foreign banks. Now that the entire Ponzi scheme is going bust and the castle of cards is collapsing, the government wants me to pick up the tab. Give me a break!

[ajk]

My sister-in-law borrowed $10,000 from my mother-in-law to invest in a business. My mother-in-law was not an investor and would not share in any profits; she was just a lender. My sister-in-law's business went bust.

Should my sister-in-law pay back the money she borrowed from my mother-in-law? She didn't, and all her brothers and sisters as well as her mother consider her a thief. If you borrow money and promise to pay it back, you pay it back even if you don't make a profit, no matter whether you borrowed the money to invest in a business or in a house.

[toby]

While we are at it, can we reduce the amount we own on Cars?

Since Capitalism doesn't matter anymore, can we lower what I pay for cable too...

[wasco]

The idea is absolutely ridiculous. Never will happen. boy we sure have great people running this country dont we?

[William Pierce]

Ben "The Fool" Bernanke has just created a perverse incentive for any home owner (including those who are able to pay) to talk to their bank and see if they can get their principal reduced!

This will clearly not work!

The only answer is to let the housing price fall to a level where supply meets demand!

[1987]

Welcome again to George Bush's world. You can open your eyes now. This idea comes to you from the same idiots who think 12 million illegal aliens should get a pass (amnesty) instead of being deported. When was the last time you remember anyone in government or the American business community taking responsibility for any problem they created. Please!

[gc67]

Hey, gimmeabreak, I'm with you! I have a $100K loan for my MBA and a $20K loan with Nissan. Neither the degree or the car are worth what I'm paying for it....why can't I walk away from that too? Why is it just the homeowner's that are getting a break?

[MV]

I do not agree with cutting the principal, but I do say they should re-adjust the loans to the interest rates they started at and convert them to 30 year fixed loans. Let the people keep paying the loan they signed up for. This will give the banks the money they want, and keep the home owner in the home, making the payments. Maybe then we can slow down this foreclosure crisis.

[david]

Yeah, agree with most folks here that simply cutting the principal of a loan seems unfair.

The core of this whole issue is pricing, and I don't understand why Americans -- usually a smart lot -- did not simply refuse to pay the unrealistic prices sellers asked. People have to be responsible for themselves at the end of the day; Americans were not responsible for themselves during this time, and cutting the amount they owe doesn't seem like it will instill the fact that you shouldn't buy something you can't pay for. If this lesson had been learned, buyers would have refused unrealistic pricing and sellers would have had to adjust.

Pricing is one of the central concepts of the whole capitalist system -- it balances supply and demand; if people lose their sensibility when it comes to pricing -- I guess because contemporary Americans have been weaned off paying in full in favor of monthly payments -- then the whole system falls apart.

[Tsu Lee]

Wow just Wow I should have bought a house 2 years ago, then I could be forgiven hundreds of thousands of dollar. I am not that greedy though so how about forgiving me $50K so I can replace my 15YO car and pay off the only debt I have. I am good for it the fed can even check my FICO, the last time I looked it was over 800.

[max]

I must remember to go to the bank after lunch and get me just a HUGE pile o money - I'm wanting a swank pad, one o' those Bugattis and maybe a huge yacht. I don't have a dime and I'm a renter in a crappy apartment with a regular job and income, but that's OK, someone else will pay for it, I guess. Thanks America, you're COOL! THE AMERICAN DREAM LIVES ON! Wooo! I LOVE AMERICA!

[JohnnyB]

The main focus needs to be allowing the PRICE DISCOVERY occur without the artificial props and artificial re-valuations being proposed by our current leadership and the bankers.

The market went wild on free mortgages and free credit... that's free money by the boat loads driving up prices everywhere.

That free money is gone now and the vacuum left behind should not be "filled in" with some banker's version of a housing price floor nor with Monopoly money.

The floor (equilibrium if you will) needs to be determined by buyers and sellers of homes duking it out… in a peaceful blood bath if necessary… in every local neighborhood around the country. This includes mortgage holders bailing on those mortgages if that’s their decision. Who am I (you) to tell them they have to continue paying a mortgage that is 30% less than it’s really worth (without all the free money/credit).

THIS IS THE UNITED STATES OF AMERICA: If we don’t get this right, we’re in for a truly serious WORLD OF HURT.

Plans and proposals that will be utilized to minimize the necessary price reductions and artificially prop up home values is just WRONG. They will keep me out of the market and I want to own my own AFFORDABLE home, thank you very much!

The market needs an opportunity to work through the home buy/sell process WITHOUT the free money and lax lending standards. Then, let the housing/banking/street chips fall where they may. Because after this plays out WE WILL BE ON MORE SOLID GROUND… and not some shaky artifice that the bankers/fed rushed in to construct in their own defense.

That’s not to say fraud and criminality should not be dealt with… they should and swiftly. And, it’s not to say homeowners in trouble should not have any recourse at all with their lenders… they should and swiftly. But, the recourse should NOT BE MORE ARTIFICE.

My $0.02 cents… or should that now be $0.01 and falling cents…

[JOe]

"The house value dropped 125K!. Not my fault. Now what do I do. I don't think I will be able to regain that equity in my life time. Does it make sense to continue to pay this mortgage? Nope." "paying for an upside down house is stupid" MY GOD!! When did your home become another asset that you get rid of if it decreases in value? You irresponsible fools, you signed a contract to purchase an item that has no guarantees as to future value. My house dropped by no fault of my own, so I should not be responsible for it...WTF?? Your new car drops in value as soon as you drive it off the lot, (by no fault of your own) think you should not be responsible for paying for it? Stocks easily loose value through no fault of your own; think you should be compensated for your loss? UNBELIEVABLE! I know you. You bought a house you knew you couldn't afford because you though you could sell it before it resets and bank all of that appreciation. That is called taking a risk. By definition, risk involves the potential for loss. You have no right, legally or morally, to walk away from your responsibilities! Maybe we should take your children away from you because you obviously are not a responsible person and may walk away from them if they start costing you more than you feel they are worth. No bailouts! BRING BACK THE DEBTOR'S PRISON!

[mark g]

I think Ben has it backwards... here is what should be done:

Pick a "drop dead" date of May 1st, 2000. Anyone who is a first time buyer or existing borrower that has not missed a payment is eligible. Here are the terms:

1. ARM loan for first two years at rate that equals the lending institutions loan default rate (ex., Countrywide loan default rate is 1.0%, that's the interest rate)

2. At the reset, the interest rate returns to current market rate best qualified for by borrower.

3. As the housing market devaluates, any loss in value of the home at the purchase point becomes a tax rebate/deduction for the borrower.

4. This gets the market moving, protects a purchase in a declining market, rewards those who were money savy in the bubble run-up, gets banks new business so they can 'dump' the foreclosure properties, and above all does NOTHING for those who can't maintain the home they could not afford.

[LCSusan]

If only I could have held onto my house for eight years now I would have the equity I needed in 2001 plus my stupidity and greed would all be someone else's fault.

Lessons need to be learned.

http://strictlyanecdotal.com/2008/03/04/
if-the-candidates-are-the-panderers.aspx

http://strictlyanecdotal.com/2008/02/11/
there-should-be-blood.aspx

[TPB]

Bernake's suggestion of a principal write-down is exactly what this market is doing. The only difference is the free market will take its pound of flesh equally across all participants, and the irresponsible will actually pay a price.

Hands off the free market. Housing was due for a correction just like the dot-com/telecom bubble. Housing, like stocks is an investment with no guarantees.

[Aaron]

I think people are mis-understanding. Yes, it seems inequitable that people who made bad mistakes may get their financial rear ends taken out of the fire.

However, if we sit back and watch large amounts of foreclosures, the whole economy will be taken down with them. That's not a desirable result. People need to look at the big picture here.

If someone has a better idea that doesn't involve the use of the words "personal responsibility," I think everyone's all ears. But preaching "personal responsibility" all day while the US economy goes down like the Titanic is pointless. It's called a "Pyrrhic victory." Maybe you win the "personal responsibility" argument by letting millions be forced to attempt to declare bankruptcy, but the victory will be at the price of another deep Depression.

Personally, I can stomach knowing that people's bad decisions will be rewarded, if it prevents a full-scale economic depression.

[ggrob]

To help resolve the housing crisis, lenders should re-negotiate the loans for longer time periods ranging from 30 to 50 years, maintain the current rate or increase only slightly and stagger the due dates for the bulk of their mortgages. While there will always be some people who default on loans, laddering the loans will reduce the monthly payments for the homeowners, save the lenders from carrying too much paper, reduce defaults and reduce the likelihood of a glut of foreclosures occurring at one time.

[Joesph Bertelli]

America... home to the world's greatest Deadbeats and to politicians and a central bank who like it like that.

Moral hazard? Banish the thought. Ben will bail you out. Spend, spend, spend!!! We'll unload the debt on our kids and to all those stupid foreigners who line up to loan us cash and get paid back with worthless US dollars.

[Ruth]

Let me tell all of you, the Lenders knew exactly what they were doing. I do not own a home but I KNOW it isn't just the fault of unsophisticated buyers. The greater culprit are the Lenders because it is THEIR money and they make the rules on buyers that they want to target. Lenders create the programs to fit risky buyers so that they (the Lender) can make money. The Lenders want new income at the end of each month which is the best time to get risky buyers approved because that is when the Lenders come out with the risky programs. The buyers are mostly unsophisticated and have no idea that these are sucker programs. To them it seems like a good deal to make their dreams come true. Why did the Lenders approve the ever increasing inflated prices? They knew most of those loans would go bad, but the government usually bail them out. I agree the buyers should be smarter, but they aren't. There will always be more dummies than bright people in the world.

[Maggie Knowles]

Hey, if you want to stop the jingle mail, what else can they do? People are going to walk away if their payments keep going up and their principle keeps growing too. It's the only answer that makes sense. They should track the difference and make the borrowers pay it back if they ever sell the home at a profit. It's good see that someone in power is putting a solution on the table that could actually work. Best of all, there is no gov't. bailout, it's worked out between the lenders and the borrowers.

[buz]

The government is inept. They couldn't figure out that Saddam had no WMD's, let New Orleans implode after Katrina, can't secure the border, have no clue what to do about Social Security and on and on. And now they think they can magically pull off a last second Hail Mary pass to stave off the inevitable housing correction. Ha. Bret Favre maybe. This group of clowns, NEVER.

[MB Watcher]

Bernanke knows how terrible this idea is, it's just better than all the other terrible ideas.

The Fed is in panic mode.

See: "Free Money if You're Underwater" -

http://tinyurl.com/2tg7zf

[SonOfLukeSkky]

I was all set to invest in a home in the high 200K range a few years ago when the housing/lending craze hit and poof! overnight the type of home I was eyeing went through the roof in my market. Clear into the mid-300Ks. It made no sense to me.

I was miffed and whined to all my friends till I almost had no friends left, but no one cared about my feelings/opinion. I took my option B...the responsible thing to do.

Now, finally the market is about to shake the "irrational exuberance" and re-adjust itself to reality and The Feds want to intervene? Who's being the bad guy here? Please let this thing descend enough to where I can get on. I've been good and patient and ... let the good guy win one.

[Matthew]

Reducing principal is a terrible idea. If they are going to enact some sort of bail-out, it would make much more sense to reduce and freeze interests rates. Those rates change all the time anyway. If you have a $400,000 loan that you reduce by 30% to $320,000 and charge a 6% interest-only loan, the payment drops from from $2,000 a month to $1,400. Lower the interest rate 30% from 6% to 4.2% and you also lower the payment from $2,000 to $1,400 but everybody still owes the actual amount they borrowed.

Also vital to this strategy is to make all of these low interest rate loans ASSUMABLE! Then end buyers or investors with good credit and verified ability to make payments could buy properties with good loans and help stabilize markets.

So what if you owe more on the house than what it is worth today? In 10 years it will be worth more than you owe once again.

[Paulson]

In fact there is a proposal coming from Office of Thrift Administrasion under Treasury.

It handles the principle reduction fairely to everyone.

For example, Neighbors Borrower A and Borrower B owe Lender $400K each in Priciple for same House,
Lender reduces $100K from priciple for Borrower B, Gov issues a certificate to lender for B's house indicating that there is $100K extra debt attached with the house (10% for Current Owner, 90% for Lender).

So Borrower A still owes $400K for the House wihtout a certificate, Borrower B owes 300K for the same House with a 100K attached.

When Borrower A sells his House for $500K, his gross profit is $100K, $400K goes to Lender
When Borrower B sells his House for $500K, his gross prifit is $10K, $390 goes to Lender.

Both Buyers own same house at same price without certificate each.

All parties get treat fairly.

[Jim P.]

Making the banks reduce the principal owed is so bone-headed I sit aghast. Didn't communism prove to be a wash-out about 18 years ago?

The bank paid x dollars out to someone when that house sold, now this guy wants them to take eat some percentage of that money and just make it "vanish"? Why not go all the way then...require everyone who sold a home in the laxt five years to refund some of the gains they made when they sold the house to help the poor current homeowner who apparently could not do basic arithmetic to see if they could afford to keep paying when the rates jumped or who gambled that the ride would never end and prayed that no one would actually come along and ask them to pay for their folly?

Short of showing proof that the bank/loan company/real estate agent drugged the homebuyer or held their family at gunpoint to force them to sign the loan papers, I don't see this as anyone's fault but the people who thought they could get an endless free ride or who didn't bother to look ahead and forecast a "worst case" scenario to make sure they could afford things down the line or those who simply refuse to work simple sums to see how much they could end up owing.

When I had an adjustable loan, I made darn sure I could afford the maximum it could possibly jump to. I bought less house than I would have liked but I was safe no matter how high my rate rose (I made sure there was a rate cap NOT a payment cap, that way leads to bankruptcy.)

None of these schemes seems to do anything but cost people like me a lot of money as we have to suck up the slack of dummies who got in over their heads.

You signed a contract, you agreed to pay the piper, no one forced you to buy high andf get open-ended interest rates.

If someone can show that a bank or a lender or a broker defrauded people or violated the law, let them bring charges in the courts. If the actions were legal, it's the homebuyers' problem for being stupid and it is not my problem nor should I have to pay one red cent to bail someone out.

[are they crazy]

$800 BILLION in equity extracted in 2005 alone. How much of this so-called housing problem is people that HELOCed or refied themselves into poverty? Why should they get a pass. If you remove the flippers, speculators and refi clowns from the equation, then take out the idiots that claim they didn't know they had an ARM, people that lied on their loan applications either inflating their income or lying that it was a primary residence, take out the people that borrowed way more than they could afford, then add the arrogant folks that have decided to bail even if they can pay their mortgages and who is really left to save. Trying to make business decisions based on a bogus sham is just plain crazy.

[Mee]

So what about people like me - who have not bought anything (with loans they already knew they won't be able to afford 3 years down the road) and instead chose to rent and live within their means.

I feel like a fool for not buying something I couldn't afford WHEN now everybody is being rewarded for "bad choices".

It is demotivating - lesson learned "Take all you can get, every quick buck, because nobody will ask for it back"

[Jeff]

It doesn't matter what you do - helmet laws, seatbelt laws, mortgage bailouts. You can not protect people from their own stupidity. Stupid people will do things that smart people will never conceive of. And don't think that a bank president is one of the smart people. In the case of the mortgage mess, their is plenty of stupid to go around.

We need to fix the root causes of the problem - education, personal responsibility (encouraged through education), and a secular humanist approach to life where we don't expect miracles to save us from ourselves - oh, that's back to education and personal responsibility ....

If you think the mortgage mess is bad - wait until you turn the faucet and no water comes out.

[egenda99]

Do not forgive the debt. If you can't think of anything else to do how about breaking up the current loan into a new smaller loan (that is manageable) at some lower amount ($400K 9% loans goes down to $300K 5% ARM) and set the rest of the amount (in this case $100K) as a 5-year ballon at 0% interest. Let them work through this process and in 5 years re-write the $100K loan at current market rates. Give the housing cycle a chance to cycle. But the loan is on the books and the consumer can not go out and get fresh credit until it is paid off. The only money the bank is "writing off" is the interest on the $100K.

[another big elephant]

the other big elephant in the room is that loan reductions won't help folks with their property taxes or maintenance expenses;

thus, the loan reductions will only make it possible to sell, I think, without a short sale process.

additionally, because of the price reductions, credit ratings might stay intact and let home sellers move into more reasonably priced homes.

this might be important since "fewer buyers leads to fewer sales and lower prices."

[Mojo]

Correction: Greenspan and the Bush administration allowed the Private Equity Markets and Hedge Funds package sale of CDO's, Collateralized Debt Obligations which are used as method of structured finance products to package the "good" borrowers with the "not so good" borrowers. That in turn was sold to investments worldwide. There is your answer. Firefighters go back when investigating an Fire and seek out where the flame was started. The Flame started with Greenspan, Bush administration and the invention of the CDO's.

[MyLessThanPrimeBeef]

To paraphrase President Bush, what Ol' Bin Lackey here is trying to do is snatch 'defeat' out of the jaws of those who try to defeat us and our free, capitalist society...or of those who are for men and wome behaving irresponsibly, or something... Grrrrrr, I give up, the sentence doesn't make any sense.

All I can say is, grow up! There is no room for Puer Aeturnus. If you can't take the heat, the punishment, well, just get out of the free market!

[arroyogrande]

"My husband and I bought a house 1.5 years ago. It was about $150K more than we planned on spending but our mortgage rep assured us that this loan would make the home affordable...Everything he told us was untrue."

Not to be too harsh, but do you think that you might have been a little too excited and greedy to get the house (especially at $150K more than you thought you could 'afford'!) that you didn't take it upon yourself to study and understand your loan documents? Was it a $500,000 loan? A $750,000 loan? A $1,000,000 loan? Can you possibly see why someone might think that you shouldn't have been so cavalier when signing a loan for that much money? The lenders/investors are at fault for giving you the loan, the broker is at fault for misleading you, and you are at fault for rushing into signing the loan documents.

Anyways, for those that fear that a loan write-down will allow prices to start rising again, pricing you out forever, no need to worry. With loan standards tightening (actual verification of sufficient income, actual down payments needed, higher FICO scores needed), the demand side of the equation has been hobbled enormously...in other words, even though people may WANT to buy now to catch 'lower prices', many of them don't have the ABILITY to buy. And that fact will remain until house prices track wages, just like they used to.

And that mans that banks will be right where they left of as prices continue to decline...having customers who owe more than the collateral (house) is worth. By reducing foreclosures, it will just take more time to reach equilibrium.

One last point...for "inflation" to (eventually) help out strapped homeowners, you need more than price inflation...you need wage inflation. Anyone seeing signs of wage inflation during the last five years? Hmmm, not much...

- arroyogrande

[Curious]

So if you over-borrow, over-spend and don't pay on time, you are rewarded with a debt reduction.

And if you borrow within your means, spend within your means and pay your bills, you are rewarded by having to pay the full amount.

Is it just me? Or does this seem nonsensical?

[Raul]

Looks like a good idea, if it makes economic sense to the Banks, we dont think the home owners that are under water would complain, and house prices would not come down as much as we were thinking..... just maybe another 50%.

[the problemwithcaring]

That is called taking a risk. By definition, risk involves the potential for loss. You have no right, legally or morally, to walk away from your responsibilities! BRING BACK THE DEBTOR'S PRISON!

Posted by: JOe |

If people have no right to walk away, where was the "risk"? Under your definition, what people with mortgages signed up for was more akin to indentured servitude; only the banks took financial risks.

Well you are right about that. The banks took huge risks, not just with their own assets; they were sure to spread the perceived goodness all around just in case, to further minimize their “risks.” With each of the citizens you would have imprisoned, the banks signed a contract using their own lending rules, guidelines and definitions of collateral. Banks gave these so-called thieves, morally-bankrupt morons, & financial illiterates, with their stated income docs and high FICO scores, the ultimate Financial Seal of Approval - a mortgage. These crooks you lambasted apparently are the crème de la crème of our society, Joe! And the banks had most of them as paying slaves, I mean, customers.

But, the banks wanted MORE. So they decided to play Russian Roulette with their own lending standards.

Now when Mr. Bernanke (as Oliver Twist) shuffles out to ask for a taxpayer bailout – the financiers make sure to say “it’s for the homeowners! It’s to do something – anything!- about the foreclosure crisis."

Don't be fooled. There is no “Foreclosure crisis.” There is a banking system crisis because the banks are the unregulated profiteers responsible for this mess, and every bailout’s goal will be to benefit and continue the longevity of the banking system.

Don’t let such crude a tactic as wordsmithing (again) obfuscate the issues…we already fell for “surge”…

[imtired]

I'm in the top 1% of earners and I can't a afford a house in LA. Boo-hoo.

I'm a lawyer and I can't get a ritzy place. Boo-hoo.

I was smart enough to see the bubble, so I saved, and sacrificed, but I'm gonna get scr@wed. Boo-hoo.

I follow all traffic laws but people keep cutting me off and I'm the only one who believes in signaling. Boo-hoo.

You should change the name of this blog from LA Land to LA Whine.

[mbob]

"... we want to help borrowers in trouble, but we do not want borrowers who have avoided problems through responsible financial management to feel that they are being unfairly penalized."

Hey Ben, that helicopter might come in handy for those quick departures, like off the roof of the US Consulate in Saigon after another Republican's exit strategy didn't quite play out the way they thought it would/could/should.

[Rich]

When financiers have to deal with a big problem, they do a cost/benefit analysis and accept losses or go for gains based on the numbers. When politicians have a big problem, they do a cost/benefit analysis of what various options gain or lose, and go with the numbers. When the Pentagon fights a war, they do a cost/benefit analysis, decide on an acceptable body count, and go with the numbers. When a California homeowner is faced with this big problem, you guys scream and yell like morons about "responsibility!" and "hard work!" which solves nothing--like the guys who are working on the big problems can even care about that stuff. That's why you guys are chumps and little guys, and deserve to be. You might make good little league coaches, but you are losers in this economic game because you can't see beyond your tiny little domestic world. The guys who run your government and economy are going to do triage to solve the hard problems, and none of your screaming matters.

As for today's issue, one important little detail that would need to happen is that the giveback amounts need to be recorded on town or county land records. After all, if the selling price of a house was reduced by a big amount after it was sold that affects comps and taxes for everybody else and the local authorities have a right to know...

[MyLessThanPrimeBeef]

Hey, Imtired, welcome to LAWhine.

You're an official member now...part of the gang.

Congratulations!!!!

[Aaron Kramer]

I find the proposal utterly baffling and most bloggers have correctly pointed out that this is a bank bailout. (Keep homeowners in homes and depreciating assets off bank ledgers) Additionally BB also stated that the banks should give unside down homeowners enough equity so they can qualify for refinancing through a FHA loan, or other federally subsidized program, in order to shift the risk to the US taxpayer and away from the current lender/mortgage holder.

I hope that the current homeowners out there realize that BB also just told the world that home values are close too 50% overvalued. Now you can argue this point but ask yourself one question, if he didn't believe that home prices are 50% overvalued why would he advocate such a drastic preemptive move by the banks? If he thought that prices would stabilize wouldn't he tell them to hold the property on their books? Home prices are determined by the price of a recently sold equivalent home (the marginal home) and foreclosed homes are part of that mechanism.

We are headed to a deep DEPRESSION people, wake up and smell the coffee. Our currency is collapsing and many banks are technically insolvent. Prepare for the worst and hope for the best.

[Iappreciate the help]

WOW you people are mean. My husband just lost his income in Dec, I just got a nice job (feb) making $2k a month - we have depleted our saving to make the last four mortgage payments to stay in our home. We have no more options other then the Chairman's glimmer of hope ie. reduce the mortgage amount.

[MyLessThanPrimeBeef]

Mbob, you might say, to use the newest German word I just learned, which apparently was voted one of their favorite foreign words, according to the Goethe Institute, and I have to admit, it is also fast becoming one of my favorite words period, along with 'cucurucucu' from Brazil, Ol' Bin Lackey 'macht Fissimatenten' or is making a fuss/an excuse.

[anysia]

why should i be punished for living within my means?

i say we ALL stop paying everything we owe. let's see what happens then. i'll just set my money aside (under my mattress, fireproof safe sort of thing, NOT in a bank.......)

if noone pays, even those of us who are making ends meet and knew our budgets and still know them, what will happen then?

another great depression? bring it on. maybe that is EXACTLY what this country needs.

a complete overhaul of alot of things is in order. it's desperately needed.

[Phil]

Bernanke has it right. Not this suggestion alone, but he's thinking in a larger context. As usual, all the professional and amateur economists who will torch this suggestion fail to consider the human and political factors. Thinking about the problem from a top-down perspective, it's vital that the foreclosure cascade be dramatically slowed. Why? Because tossing people out of homes that won't sell anytime soon only degrades neighborhoods and threatens the social integrity of communities. Keeping people in homes they already "own" is far preferable. The economic thinking ignores this, but the consequences of cascading erosion are profoundly economic along with the social wreckage of volume foreclosure activity.

Bernanke is also signalling the lenders that they must participate in the solution. Or the financial sector has to engineer the next (and bigger) bubble to float us out of this crash. Which just kicks the can further down the road.

It's in no one's interests for everyone who has leverage here to sit on their hands. Not the government, not the banks, not the cities and not homeowners. You want to lose value in your property faster still? Let the foreclosure crisis spread to your neighbor and tell me you're not paying a price.

Ideas like Bernanke's are worth fleshing out. Certainly market forces alone will sort out the current problem if left to operate, but they will be slow and socially devastating to the point of endangering you too. The larger social context has to kick in at some point, folks. I say this as someone paying my mortgage.

[martin]

Our elected officials inbed with special interest groups have for years through GREED lead America, land of the free to the brink of "ECONOMIC AND MORAL IMPLOSION FROM WITHIN". Will it matter down the road when our every move will be monitored in order to determine if you are following the rules of some "New World Order" government, and NOT the goverment described in the U.S. Constitution for and by the people of the United States. What the PRIVATE Federal Reserve Bank along with bankers of the world able to foresee this mess and honestly avoid it? You have control of the money and gold you can call all the shots.

[Corntrollio]

This suggestion by Bernanke is terrible and only slows down the inevitable. Housing prices are going to drop because the housing bubble has to be corrected. Trying to keep people like tabutl who bought way too much house for their income in their houses is not a worthwhile goal because the banks will be better off taking over and reselling the homes themselves. The bubble has to be corrected, and the market can correct it much quicker than any fake election year junk science Bernanke can come up with.

[Maggie Knowles]

Hey Mojo - I saw this on a panel discussion regarding the housing market recently (and I'm sorry I can't find a link to the video) - it went like this:

The mortgage crisis has never been about home ownership. There are 6 major players in this scheme, the home ownership deception scheme.

1. Brokers, 2. Lenders, 3. Investment Bankers, 4. Rating Agencies - and the ones they lure 5. Investors and 6. Borrowers

(you could think of 1-4 as fishermen and 5 and 6 as fish)

1 thru 4 have no skin in the game and they are working for Wall St. and have made off with billions of dollars.

After the high tech boom, the housing market was the next investment vehicle that Wall St. was going to push.

Before 2007, real estate was the best investment in America. How does Wall St. take advantage of that? They package mortgages together and sell them at a higher return. "They can't lose, they're the best investment in the world!" There was a high demand, but there was one problem - there wasn't enough product (borrowers - there were only so many people who had 20% down, high credit ratings, etc.)

Where do you get more product (borrowers)? Start creating products that a wider market can qualify for. So first came the A. sub-prime loans, then came the B. high-rate "strangulation" ARMS (interest rate only goes up, not connected to LIBOR or Prime Rate) where payments will double no matter what happens in the market and principle is never paid down, then came C. a negative amortization product (where principle grows and is never paid off), then came D. Option ARMs, then came E. no doc loans. (I may have missed some data regarding these loan products, but you get the idea.)

The point is, the loan products are defective by definition. When you recognize that these are defective products and this is orchestrated to generate billions of dollars out there for the four players in the middle (1 thru 4 above), then what's the solution?

I think this story makes sense. It matches what I witnessed.

[John]

we should just take the money back from the people that sold the house and laughed all the way to the bank...

You sold your house for 1 mill but it was only worth 500,000 grand. Give it back..

[sfvrealestate]

All these posts! Wow!
"why do the Wilsons get a special break so they only have to pay $350,000 for their house, but we still have to pay $500,000 for an identical house?"
I admit, the idea is kind of stomach-turning. But consider this:
1. You pay $500k for your house.
2. The Wilsons pay $500k for their house.
3. The Wilsons can't keep up the payments and go to foreclosure. So do a few others on your street.
4. After all the foreclosure dust settles, prices have dropped. The Wilson's formerly-worth-$500k-house now sells for $350k.
5. Your formerly-worth-$500k-house is now worth...yup, $350k, because that's what the market will bear for these identical houses.
So, either way, you lose. However, it's a paper loss unless you, too, are looking at your house as an ATM.

[pathetic]

Great, now the REPUBLICAN administration is proposing communistic solutions. Wow, what will a Democratic administration do? Welcome to North Korea.

[Louis Blasiotti]

Here we go again. The problem is deeper than the sub-prime issue. The fundamental problem is one of moral deficiency and a profound lack of personal responsibility which has been cooking for many years in our country's kiitchen. It started in the 1960's and has continued it march onward. It has affected the quality of workmanship, the deterioration of our educational system, increased inflation for many years, and the unwillingness of governments and churches to tell the plain and unbridled truth. Social philosophies like "do it if it feels good" and "everything is relative" and "amorality is ok" etc., etc., etc. This loosey-goosey immoral behavior has caused tremendous problems in our society at ALL LEVELS. It is time to wake up and it is time for truely believing Christians to re-assert themselves into every area of society and to reestablish correct standards of living throughout the society. Our freedoms established by our Founding Fathers were premised on the idea that God-fearing folks had a finely honed conscious and would do the right thing not because the government had a gun pointed at them but because of love and fear of the Almighty who made us and that what wrongs we did here on earth would have to be accounted for in the next world. Our freedoms were based on the bibical idea that we would be responsible and God-fearing people and could be entrusted with those freedoms assuming that we would not take advantage of them.

Wake up folks because we may lose more than our homes and our money....we may lose our precious freedoms and ultimately eternal happiness with God in the next world due to our lack of personal responsibility and our sinful ways and our disregard of the 10 Commandments. Our enemies would love that since they cannot defeat us militarily therefore they would enjoy watching us self destruct via our immorality.

Something to think about before it is too late.

[Hugh Jorgan]

WAIT FOR IT...WAIT FOR IT...Get ready...Opportunity is coming to those that wait.

Unless you absolutely cannot afford the payment, stick it out. You WILL regain the lost equity. It make take a couple of years after the market hits bottom, but the equity lost will return. The loss of equity only appears when the sale is made. No you can't use the house as an ATM, but you shouldn't be doing that anyway.

And if you can't make the payments, you need to get out of the situation ASAP. Let the foreclosure happen, live with the bad credit rating for how ever long you must. It was inevitable because of your circumstances.

One man's meat, is another's poison. In crisis, there is opportunity.

[aldo818]

It seems that our government is geared to reward the less wise as opposed to the most responsible.

Has anyone here seen the movie "Idiocracy?"

It gives a hypothetical picture of what the US would look like in a few hundred years based on the reproduction rates of the less intelligent.

Ever notice Nobel prize winners only have a couple kids when high school dropouts have like ten?

Just a thought...

[Laker]

Helicopter BEN: "More than one-half of the foreclosure starts in 2007 were on subprime mortgages." ----> what about the other slightly less than half..so 40%-50% of the current foreclosures are from PRIME borrowers...obviously subprime will default in higher numbers but this shows that everybody defaults, and BB just insists on focusing on subprime...

Helicopter BEN: "A recent estimate based on subprime mortgages foreclosed in the fourth quarter of 2007 indicated that total losses exceeded 50 percent of the principal balance... With the time period between the last mortgage payment and REO liquidation lengthening in recent months, this loss rate will likely grow even larger." ----> So BB, you are telling us the the housing prices are due to trip 50% of their value...oh wait, you said even more....GUYS and GALS, BB is just affirming my estimate of home prices in LA are due to a 50% hair cut or 2000-2001 values....

Helicopter BEN: "Nevertheless, scope remains to prevent unnecessary foreclosures." ---->scope should remain bringing affordable houses no limiting or slowing down the price discovery! Instead of treating the drug addict, you say we should cut back on police to stop the drug dealer and smokers...

Helicopter BEN: "In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure." ----> So I go a head and buy a hummer i can't afford. And ask GM financial to reduce me $70,000 loan back to $30,000 so i could afford to pay $400 instead of $1000. ohhm BB, can you also trip my credit card bills and reduce my balances...10X.

Helicopter BEN: "Moreover, were house prices instead to rise subsequently, the lender would not share in the gains..." ----> gains? the borrower most likely refied and pulled cash out to finance his Hawaii vacations and jet ski, he already gained. Now you allow him to resell the house and get profit???? BB, are you crazy?

Helicopter BEN: "risk-based premiums for mortgage refinancing--in a way that does not increase the expected cost to the taxpayer--would allow the FHA to help more troubled borrowers... servicers might refinance only their riskiest borrowers into the FHA program. A combination of careful underwriting, the use of risk premiums, and other measures (for example, a provision that would allow the FHA to return a mortgage that quickly re-defaults to the servicer) could help mitigate that risk...." ------> YEAH RIGHT! The banks just got finished with cleaning their house from the crap garbage loans and transfer it to us the Tax payers. Now, everybody expect BB knows that there is 100% chance of the loan to default...and the smart bank will get it back from FHA and absorb the loss....ahhhh LOL what a joke.

In conclusion, some have suggested a revolution, indeed if the crazy liars, over inflated income loans get a reduction in balance, and therefore continue to live in same house just making half the payment is a reason to revolt against the government. Not only responsible renters will join here, so will all the honest people that bought houses they COULD afford, all those that have substantial cash equity in their houses...
No way this none sense will pass!

[Jim-Bob Jones]

So is anyone willing to take personal responsibility any more?

Subprime and Alt-A Homeowner: not my fault, the bank lent me the money. Obviously I did not have the income to support my mortgage payment, and I certainly did not have the income post-reset, but hey, this is America.

HELOC Homeowner: it's not my fault. Housing prices always go up. So what if I used that $200K cashout to buy a BMW and go on a swanky vacation. I deserve a little fun too.

Bank: it's not my fault. We had too many irresponsible borrowers who lied on no-document loans. We made huge profits during the boom, but we've made so many write-downs recently. Poor us.

Investor: it's not my fault. Just because I put nothing down and tried to flip the house within 6 months by painting the kitchen and putting some cheap tile in and raising the price by $200K doesn't mean I don't deserve a bailout.

Wall Street: it's not our fault. We didn't know the full ramifications of securitization with these kinds of products. We made a bad guess, and just because we all got $400K bonuses last year doesn't mean we shouldn't get bailed out. We're hurting too! Do you want more Dubai investors to bail us out? Dubai is in the MIDDLE EAST --- oooooh, scary.

[davidarchuleta]

But consider this:
1. You pay $500k for your house.
2. The Wilsons pay $500k for their house...
5. Your formerly-worth-$500k-house is now worth...yup, $350k...
However, it's a paper loss unless you, too, are looking at your house as an ATM.

Posted by: sfvrealestate |

Ugh. A straw man wrapped in caveat.

And as far as caveats go, "it's a paper loss unless you, too, are looking at your house as an ATM" is no small one.

Using this HORRIBLE analogy, it basically means you won't benefit from the current bailout proposal unless you (as in every homeowner) identify yourself and "the Wilsons" as the same.

Now, granted, to a real estate agent everybody's finances ARE the same...

[Laker]

Paulson: "When Borrower A sells his House for $500K, his gross profit is $100K, $400K goes to Lender
When Borrower B sells his House for $500K, his gross prifit is $10K, $390 goes to Lender....All parties get treat fairly."
1st, it will take ages till that shack is going to be worth $500K.
2nd, What kind of flipper/investor will be happy with his house to appreciate 20% and he only gets 2% ???
No go from get going....

Another long-time reader and first time poster here. Just like many of the readers who have contributed to this blog, I'm pretty pissed off at all the talks about the mortgage bailout. It looks like each new "bailout" proposal that the govt suggested is adding more insult to those hard working people who try to live within their means in order to save some money for a down payment. I guess patience has no reward nowadays. Just look at the price increase of gas and foods and the drop of interest rate, your hard-earned saving is losing value everyday!

Many readers have voiced their frustration in this blogs. I don't know if anyone here has experience in organizing a civil demonstration where all the people who are against any type of mortgage bailout can meet to voice their discontent to the elected officials. It'll be interesting