Fed Chief Calls for Mortgage Companies to Reduce Balances Voluntarily

Helicopter Ben is suggesting that mortgage companies voluntarily reduce principal balances on mortgages as a response to the deepening foreclosure crisis.

His suggestion goes further than the bankruptcy legislation pending now, and endorsed repeatedly on this and other blogs and websites, and even USA Today, in that the legislation would allow bankruptcy judges in Chapter 13 cases to lower balances only down to the value of the home, not more.

Bernanke said “reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.” He is pushing long term solutions, rather than just lowering the interest rate, as has been done with some loans. Bernanke is rightly concerned that these stop gap measures will only delay foreclosures.

From about a million per year for 2006 and 2007, he is looking at 1.5 million foreclosures for 2008.

Being that the mortgage industry has lined up its big guns and drawn a line in the sand against any change in the bankruptcy laws, it is unlikely they will heed the Fed chief’s suggestion.

It seems the mortgage industry is dead set against bankruptcy law changes because they fear that Congress would feel the crisis was dealt with and would not pass any of the bailout bills they do support.

Interestingly, there are strict requirements in the proposed legislation for qualifying to have your mortgage balance reduced. This contrasts with the lack of underwriting requirements when the mortgage companies were throwing money out the window for “no doc” loans, and creating this crisis.

Let your Senators and Representatives know how you feel. Even if you are not threatened with foreclosure, your neighbors are, and the foreclosure tidal wave puts more downward pressure on home values, which affects all homeowners.