Ben Bernanke has gotten mixed reviews on this blog and within the larger media. My biggest beef with him is that every time he opens his mouth, the market tanks. His lack of consistency and his often too direct statements are the worst of both worlds - a Fed Chairman who'll tell you exactly what he's thinking, but you can't bet that his position will be the same from day to day.
Bernanke's recent public discussion included this recommendation to lenders:
Bernanke's Call: Aid Homeowners
Fed Chief Asks Lenders To Take Aggressive Steps To Address Housing Crisis
By GREG IP
March 5, 2008; Page A3
Federal Reserve Chairman Ben Bernanke, raising the level of urgency in dealing with the nation's housing crisis, called on lenders to aid struggling homeowners by reducing their principal -- the sum of money they borrowed -- to lessen the likelihood of foreclosure, and endorsed a bigger role for the federal government in backing such mortgages.
Mr. Bernanke's call, in a speech to bankers, is an acknowledgement [sic] the current focus on reducing homeowner's [sic] monthly payments by modifying their mortgage rates doesn't solve the underlying problem: the increasing number of American homes now worth less than their mortgages. It also suggests Mr. Bernanke is willing to advocate more aggressive measures to address the deepening housing crisis than the Bush administration has endorsed.
"The current housing difficulties differ from those in the past, largely because of the pervasiveness of negative equity positions," Mr. Bernanke told the Independent Community Bankers of America in Orlando yesterday. With negative equity, which means a home is worth less than its mortgage, "a stressed borrower has less ability...and less financial incentive to try to remain in the home.
"In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure" than reducing the interest rate," he said.
A "potentially important step" to make this happen, he said, is to expand the ability of the Federal Housing Administration to guarantee larger mortgages and mortgages on which the borrower is, or is about to be, delinquent, in effect having the federal government backstop many loans that would otherwise go into default.
Mr. Bernanke has taken an increasingly activist stance on multiple fronts in battling the housing crisis. He has slashed interest rates, backed fiscal stimulus and has positioned himself between congressional Democrats, who want more government resources committed to preventing foreclosures, and the Treasury, which has focused on voluntary steps by lenders such as modifying interest rates on mortgages.
So, someone takes out a loan with no money down on a home and Bernanke just wants the banks to eat it? He's calling for the lender to hand out a check for $250,000 on a home (valued at $250,000 at the time) and now tell the borrower, "Hey... remember that 250g's you owe us? Let's make it just 200g's and you can pocket the other 50.
The ramifications of such a "solution" are laughable:
- borrowers that are currently making their payments and working with their lender to get a reduced rate on their principal will stop those efforts in the hopes that they can get the reduced principal solution and/or refinancing from the FHA (aka the American Taxpayer)
- Borrowers will continue to seek out homes that are at or above their maximum limit for housing price, given the possibility of this type of a solution becoming the norm should they start to default
- Credit will become even tighter as lenders understand that not only are the rate terms re-negotiable in a static contract, but that they might also see pressure to just write off large portions of the amount borrowed as a loss just for the heck of it. Who would invest in a mortgage industry knowing that the terms of any contract might come under government pressure to be invalidated?
That Bernanke also calls for an increased role of the taxpayer to cover people's
ARC: St Wendeler