Mercury Rising 鳯女

Politics, life, and other things that matter

Banks catch up with Mercury Rising

Posted by Charles II on March 24, 2010


Alistair Barr, Marketwatch:

Since the mortgage crisis hit in 2007, U.S. banks have tried many strategies to hold back the tidal wave of foreclosures. But one thing the industry has mostly avoided is cutting the principal owed on troubled home loans.

That changed Wednesday when Bank of America Corp. , the largest U.S. mortgage lender, unveiled a program to cut principal on up to 45,000 underwater home loans by as much as 30%.

Banks have been reluctant to cut principal on mortgages, because this would leave them having to take immediate losses on those loans. There’s also concern that more homeowners would try to get their principal reduced if they see others getting such treatment, leading to a costly free-for-all.

“Regulators and the government have been in favor of principal reductions, but banks have struggled to sell the idea to shareholders,” said Matt Albrecht, a financial-services analyst at Standard & Poor’s Equity Research, in an interview.

However, some homes have fallen so much in value that banks may be more open to principal reductions now, he added.

“The cost of foreclosures is greater than the 20% to 30% reduction in principal that the banks are discussing,” Albrecht said. “If they can reduce the principal a bit and ensure homeowners stay current, long term that works out better than going through foreclosure and flooding the market with more distressed homes.”

I posted this, what?– two years ago?

No, it was almost three years ago.

But the blogs are all run by DFHs who don’t know anything and are taking the jobs of the heroic journalists away from them.


4 Responses to “Banks catch up with Mercury Rising”

  1. ShortWoman said

    Yes, I agree that this is long overdue. But it’s also only 45,000 homeowners with certain qualifying sub-prime mortgages written by Countrywide. And there are some details that make me wonder if anybody outside of Massachusetts will “qualify”.

    • Charles II said

      Even 45,000 mortgages represents a lot of money. If forgiveness averages $50K, we’re talking over $2B. However, I suspect Bank of America that a major goal of this is to convince people that its balance sheet is sound. Some people think that it may not be. Others point out that this was a decision (metaphorically) made at the business end of a shotgun.

      But of course the point is that the business press is only just noticing that it’s cheaper for the banks to forgive debt than it is to try to squeeze blood from turnips. And, frankly, them asking as arbiters of moral hazard by making forcing delinquent mortgage holders into foreclosure is a bad joke.

      • ShortWoman said

        Oh I agree that it’s a bunch of money. I’m just saying it’s a drop in the bucket as far as how many underwater and at risk loans they have. In the end, I think they are going to have to bite the bullet even harder and admit that most loans in hard-hit areas and many loans elsewhere will need forgiveness.

      • Charles II said

        Short Woman says, “I’m just saying it’s a drop in the bucket as far as how many underwater and at risk loans they have.”

        Absolutely. According to one source I saw, there is more than $1T in bad debt, nearly half of it on the books of four of the big shadow banks.

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