Mortgage Write-Downs Good or Bad?

Some things sound great in theory, but many times have unintended consequences that people don’t consider. Mortgage write-downs, the act of a bank lowering the principle balance due in order to lower the home-owner’s debt and payment is no different. To some it sound so wonderful if the big-bad banks would just with the stroke of a pen reduce the loan balance and payment of home-owners that are underwater on their mortgage.

In theory this policy sounds great and gives you a warm-fuzzy feeling that in tough economic times banks or the government would just give a big-fat “hand-out” to irresponsible people that bought more home than they could afford. As you can see this mortgage article from RISMedia suggests exactly that.

By writing down all underwater mortgages to market value, the nation’s banks could pump $71 billion per year into the economy, create more than one million jobs annually and save families $6,500 per year on mortgage payments.

That’s the bottom line in a new report by The New Bottom Line, a nationwide campaign representing 1,000 faith-based and community organizations seeking to hold Wall Street accountable and find solutions for struggling and middle-class families.

Grassroots organizations across the country aligned with The New Bottom Line campaign are calling on State Attorneys General who are investigating the banks for foreclosure fraud to stand firm for a settlement agreement that both includes large-scale principle reduction for underwater borrowers and does not release the banks from claims beyond the robo-signing scandal.

“Homeowners across the nation are struggling to pay their boom-era mortgages with their recession-era salaries and the economy is suffering for it. Writing down the principals and interest rates on all underwater mortgages to market value would serve as the second stimulus that America so desperately needs, only without added costs to taxpayers,” according to the report entitled “The Win/Win Solution: How Fixing the Housing Crisis Will Create One Million Jobs.”

The plan would lower homeowners’ mortgage payments by an average of more than $500 per month or $6,500 per year. Six billion dollars per month that is currently going to mortgage payments would instead go toward buying groceries, school supplies, and other household necessities.

As consumer demand picked up, businesses would start hiring again. For example, the plan would inject an annual stimulus of $20.5 billion in California and 300,000 jobs per year; $1.64 billion in Ohio and 24,000 jobs; and $12 billion in Florida and almost 180,000 jobs.

Last year, the nation’s top six banks paid out more than twice the cost of the plan ($71 billion per year) in bonuses and compensation alone ($146 billion in 2010), the report says. Currently, the nation’s banks are sitting on a historically high level of cash reserves—$1.64 trillion.

Now that they have made the altruistic case for just reducing the mortgage balance and mortgage payments for thousands of home-owners nationwide let’s look at the unintended consequences of such a radical and socialist policy.

First and foremost, it violates the long-held founding principle of our great nation – “The Rule of Law”. When home-owners obtain a mortgage they have entered a financial contract. The contract clearly states that if you don’t make your payments the collateral or the home can be taken by the holder of the mortgage. If we make an exception just because it involves a home it sets a precedent that “The Rule of Law” regarding contracts is now worthless.

Next and equally important is what about all the many times over more people that made responsible decisions regarding how much mortgage they could afford and have been making their payments each and every month? Why should the people not making their payments be rewarded and those that have been are by de facto be punished.

Finally, if banks were to write-down these mortgages, the banks are not taking the loss the owners of the mortgage or the bondholders are taking the loss. Why should the investors/bondholders take a loss for people that made bad decisions purchasing their home.

In the end if the write-downs and subsequent losses were taken the ultimate loser would be the consumer because the losses would force higher mortgage rates for everyone.

Do you really want to pay for your neighbors mortgage, especially if you have been paying yours on time?

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