Bernanke to Banks: Take the Hit

by: Barry Ritholtz

Will "Helicopter Ben" become "Bailout Ben"? My initial read of the FOMC Chair's speech Tuesday suggests he will not.

What Chairman Bernanke proposes are efforts to help distressed borrowers refinance, loss-mitigation arrangement between the lender and the distressed borrower, and the possibility of writing down principle.

Here's the money quote:

"In my view, we could also reduce preventable foreclosures if investors acting in their own self interests were to permit servicers to write down the mortgage liabilities of borrowers by accepting a short payoff in appropriate circumstances. For example, servicers could accept a principal writedown by an amount at least sufficient to allow the borrower to refinance into a new loan from another source. A writedown that is sufficient to make borrowers eligible for a new loan would remove the downside risk to investors of additional writedowns or a re-default. This arrangement might include a feature that allows the original investors to share in any future appreciation, as recently suggested, for example, by the Office of Thrift Supervision. Servicers could also benefit from greater use of short payoffs, as this approach would simplify the calculation of expected losses and eliminate the future costs and risks of retaining the troubled mortgage in the pool."

That's pretty astonishing talk from a sitting Fed Chair.

To reiterate, the Chairman of the Federal Reserve is advising financial institutions to take a hit, write down principal, both their own and the common good.

These are indeed strange and interesting days . . .

Reducing Preventable Mortgage Foreclosures
Chairman Ben S. Bernanke
Independent Community Bankers of America Annual Convention, March 4, 2008