Monday, January 23, 2012

Mortgage Principal Cuts Don’t Help Homeowners - Bloomberg

Mortgage Principal Cuts Don’t Help Homeowners - Bloomberg
Reducing mortgage balances is a risky idea that hasn’t been shown to keep borrowers who owe more than their property’s worth in their homes, according to Credit Suisse Group AG. (CSGN)

Of the 11 million of “underwater” homeowners, about 6.5 million have never missed a payment and 2 million more are making on-time payments after a delinquency, said Dale Westhoff, the bank’s global head of structured products research. Widespread principal reductions may drive defaults “much, much higher” as borrowers seek the aid, he said.

And of course the banking industry would have a totally objective view of this idea...


Anonymous said...

This claim does not appear to be supported by observed behavior. In fact, academics are asking why homeowners are continuing to pay on homes that are so underwater. See, White, "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis", University of Arizona, James E. Rogers College of Law, Discussion Paper 09-35 (Oct. 2009)

This paper is well-written and recommended reading. From the abstract:

...most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations - and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision. Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility. This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse.

So it would seem that reducing mortgage principal is simply going to re-distribute somewhat the already existing inequalities where homeowners are already shouldering a disproportionate burden. If the homeowners are already continuing to pay for houses that are underwater, how would principal reduction change that conduct negatively from the bank's perspective?

Anonymous said...

The sociopathic entities known as corporations, which enjoy the legal rights of personhood, are not constrained by anything as petty as ethics, morality, or a sense of social responsibility.