Bill Zielinski

Banks Forgiving Mortgage Principle: Reward for Bad Behavior?

I think it likely that the trend towards loan modifications will have unintended adverse consequences such as prolonging and increasing the value erosion of residential real estate. How often do big government sponsored programs work, especially when attempting to interrupt free market forces? The moral hazard is obvious and this program institutionalizes the repudiation of debt on a massive scale, thereby creating more losses for a broad spectrum of debt holders.
There is also a movement to change the bankruptcy laws and allow the courts to forgive mortgage debt. When you combine these factors, lending or investing in mortgages has become very high risk. To compensate properly for the higher risk, mortgage lending by private capital will either disappear or demand an appropriately high risk adjustment factored into the lending rate.