Principal Writedowns on Loan Modifications from Diana Olick

Olick points out that the decline in home sales was expected – “home sales were spiked by several shots of government stimulus in the second half of 2009, and as that stimulus starts to wear off, sales activity has nowhere to go but down.”  With the homebuyer’s credit expiring just as the 2010 season gets rolling in April, and Bernanke making noise about raising interest rates, she suggests that home buyers are likely to think twice before leaping into the market.

But Olick is most concerned about the potential for principle writedown:  “Most agree that the government’s mortgage bailout program (Home Affordable Modification Program or HAMP) is at best unsuccessful and at worst detrimental. So now I’m beginning to hear more chatter about principal writedown, and more specifically, government-funded principal writedown.  The idea is to give folks equity back in their homes so they don’t walk away from their mortgage commitments. It would also help borrowers who don’t qualify for modifications because they are so far “underwater” on their mortgages.
The arguments are plain and simple: Bite the bullet to save the greater housing market or don’t because the moral hazard is far too untenable. Anyone who’s ever read this blog before knows where I stand. I would honestly rather see my home’s value go down than see the guy next door (figurative: my neighbors are lovely and fiscally responsible) who made a poor/negligent financial decision get a mulligan at my expense.”

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