Mortgage Debt Relief Won't Hurt Big Banks

A couple weeks ago, the International Monetary Fund released a report stating that – despite what the big banks have to say – a “broad mortgage debt-relief program for distressed homeowners” would not significantly impact the nations largest banks.

The report continues: “If the four lenders (Bank of America, Chase, Wells Fargo & Citi) established a year-and-a-half long program to reduce debt on first mortgages by 15 percent for borrowers at risk of foreclosure, and also worked to lower loan balances by 30 percent until 2015 for seriously-delinquent borrowers and those in foreclosure, they'd face little consequence…”

I’ve been arguing for a long time that principle reductions are the quickest was out of the mess that is the collapse of the US real estate market. While granted it likely isn’t the easiest way out, the report released by the IMF at least shows that it’s financially feasible.

The obvious question becomes, why should only those in trouble receive this kind of assistance? It’s a valid question. Unfortunately, we don’t have many options and you have to start somewhere.

Could you start by helping those in need only, then move on and reward those who’ve remained current?

Could you wait until someone needed to sell their home and offer simply to waive the deficiency above the current fair market value, without annihilating their credit?

I would hypothesize that banks stand to benefit far more from someone staying in a home and paying a lower amount monthly, than they would from someone being foreclosed on. The cost of foreclosure is high for a bank and in the many instances where they won’t be able to collect on the deficiency – be it insolvency, state laws, etc. – the loss will be much higher, than had they adjusted the payment to the current value of the home to keep the homeowner in place.

In my opinion, I think banks could likely offer principle reductions to everyone and still be in excellent shape financially, but I have no stats to support that, so it’s just a theory.

What’s important about this study, is that it takes a legitimate first step in dispelling the belief that the loss principle reductions would bring to the big banks would be too large to even consider such action…