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

[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!

[independent voter 15]

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?