Banks must start reducing principal for underwater borrowers
It’s increasingly clear that one answer to the foreclosure crisis is the best: Banks must aggressively reduce loan balances for troubled borrowers. It will work not only for homeowners and for the economy but for lenders, who in many cases can recover more of their investment this way than they can in a foreclosure sale.
Moreover, it’s fair to ask the banks whose lending policies caused the Great Recession to do more to end it.
Smaller, temporary modifications, such as interest-rate reductions, do nothing to address the epidemic of borrowers who owe more than their homes now are worth — in part because the foreclosure wave has lowered their value. Without a reduction in principal, these homeowners have no incentive to keep making payments, even when they have an income.
Banks are reluctant to reduce principal, and the federal government has no authority to force them. But the Treasury Department could offer them financial incentives.
It’s hard to understand why more lenders don’t work with borrowers on the principal. Wouldn’t it make more sense to reduce a loan balance by, say, $100,000, avoiding the expense of foreclosing and reselling the home, than to lose twice that amount through such a sale?
The Treasury Department is working to make its programs more effective. It announced last week that California would get $700 million, much of it to aid unemployed borrowers. That will help, but not enough.
The American people were incredibly generous to the nation’s banks. Banks need to return the favor.
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As always,
Shawn