Is 'Reducing Principal' a Good Principle for the Fed?

Mr. Ben Bernanke gave a speech on housing trouble in NY on the 5th of May in which he conveyed that the Fed would recommend / encourage banks to reduce principle amounts from those mortgages where the chances of a property going into foreclosure is high.

In a way, this was anyway going on previously through the hedge funds. Hedge funds buy underperforming mortgages from banks at 40-50 cents a dollar. After this, they negotiate with home owners and offer them to reduce their principle in return for regular payments on time.

Other market forces, like short-sale properties by banks, are also being used by banks to avoid the lengthy foreclosure process. Here, the banks allow the home owners to sell the property below the principle to another buyer with an agreement that the banks will not go after the seller for the remaining principle.

If the house does indeed go into foreclosure, the process would take more than a year, during which the homeowner can stay in the property rent-free.

It looks like the financial future of a homeowner who is not paying mortgages on time is not only safe but bright, currently, with so many ways of taking advantage.

 

Comments

[ArnoldCountry:]

I think a different method is better... reduce the interest rate down to 2% on those discounted purchases for 3 years, forgive all back payments and start fresh with a fully amortized 30 year loan at 2% for 3 years, step rate and payment up to 3% in 4th year, step up payment to 4% in 5th year, 5% in 6th year, and then 6% in 7th year. While principal is underwater, payment will be so low that renting would be more expensive in most cases and most assets become performing. As the market corrects, you are gradually bringing the payment and rate up on a performing loan.

2008 Jul 11 11:15 AM

[yk__:]

What principle is involved? I did not think you could loan principles. They can be either taught or deduced. Loans only involve principal and interest.

2008 Jul 11 03:46 PM