Bernanke to banks: Cut what’s owed on troubled mortgages
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bernanke, delinquent mortgages, troubled mortgages March 5th, 2008This is quite extraordinary. The head of the U.S. central bank is asking mortgage lenders to reduce the principal amount owed on delinquent mortgages. Implicitly, he is asking lenders to take a 20 percent to 30 percent haircut on huge portions of their mortgage portfolios. That’s how far below the mortgage value many home values have fallen. What other choice does he have? In many markets mortgage banking companies are likely to take at least a 20 to 30 percent hit if they don’t alter the terms and foreclose. And foreclosure will throw homes back on the market, which will drive prices down even further. From today’s AP story:
One of the suggestions 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,” Bernanke said.
With low or negative equity in their home, a stressed borrower has less ability — because there is no home equity to tap — and less financial incentive to try to remain in the home, he said.
Tags: bernanke, delinquent mortgages, troubled mortgages
