If you missed it, Mr. Ben Bernanke made some interesting comments at the Independent Community Bankers Conference. While addressing the current foreclosure crisis, Bernanke suggested banks make principal reductions on problem loans. Here are a couple excepts from his speech (I found the quotes at Alex Stenbeck’s blog):
“In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure. “
“…a reduction in principal may increase the expected payoff by reducing the risk of default and foreclosure. ”
“A write down that is sufficient to make borrowers eligible for a new loan would remove the downside risk to investors of additional write downs or a re-default.”
This is meant for banks to manage their risk and make homes affordable for owners that would end up in foreclosure otherwise. Instead of taking a huge loss in a foreclosure situation, the bank keeps the home in the homeowners hands and continues recieving some form of re-payment instead of none. Once again, proving – bank’s ARE NOT in the property management business.
The only ‘problem’ I see with this solution, is that folks will inevitably be trying to take advantage of the write downs when they really shouldn’t really be eligible. It’s a sick sad world we live in sometimes.. but we have to acknowledge there will be potential freeloaders. No offense intended, sort of.
Here’s a link to more info about the speech
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