Our hearts tell us that we should do what we can to help unemployed people hold onto their homes. But our heads tell us that strong-arming banks into writing down every troubled mortgage is wrong and unfair.
On Tuesday, bankers came before the U.S. House Financial Services Committee to explain why they are not embracing the federal government’s loan modification plans.
The latest program offers bankers between 10 and 21 cents for every dollar of principal they forgive.
On Tuesday, executives from JPMorgan Chase, Wells Fargo, Bank of America and Citigroup got a grilling from committee members growing impatient that the bankers have not completed more modifications.`
One of the arguments for pressing the banks is based on a simplistic gut reaction: We bailed them out; now they should bail us out.
It’s not a valid comparison. The banks are paying back the TARP money they received, or buying back the stock the federal government bought in their firms.
Between interest payments and stock appreciation, taxpayers will actually make a profit on the big-bank bailouts.
The mortgage principal write-downs are a permanent loss, mainly to the banks and their investors, but to all taxpayers as well.
That distinction aside, these write-downs are completely unfair to the 86 percent of Americans nationwide who make their payments every month, sometimes struggling to do so.
Maybe these people bought more modest homes that were within their means. Or they are working two jobs to make up for the one they lost. Or they had saved money to see them through a crisis. Or they did not borrow against their home’s equity.
Meanwhile, they will be helping pay for a $30,000 or $50,000 gift to their next-door neighbor who, perhaps, lived less sensibly.
The most galling feature of the modification plan is the way it’s linked to “underwater” mortgages. These are loans that exceed the current value of the property.
Just because you bought something that has now depreciated, or that you paid too much for, doesn’t mean you get your money back.
The new car you buy is “underwater” the day you drive it off the lot. People invest in stocks that never get their heads above water. Housing is an investment that usually goes up, but has recently gone down.
These underwater mortgages will appreciate in time. What happens if we forgive $40,000 in principal on a home, then find in five years its value has returned to its original price?
That homeowner will make a killing in the market — at the expense of bank investors and taxpayers.
Finally, what will keep banks from making up for these losses by making future loans more expensive? In that way, new home buyers will be paying for the handouts given to old customers. Again, unfair.
There are a number of devices banks already use to keep people in their homes, including short sales, longer payment periods and interest-only payments, to get homeowners through a crisis.
Simply forgiving contracted debt is the worst of options.