After President Obama announced changes to the Home Affordable Modification Program several weeks ago, many banks have ran to the defensive line in order to defend their position. The Obama administration has urged lenders to consider principal forgiveness when trying to work with borrowers who are underwater in their homes. However, many big bank executives testified to the House Financial Services Committee on April 13 of the harsh reality of the new changes.
One argument against principal reduction was that of costs. David Lowman of JP Morgan Chase said that this could cost the industry between $700 and $900 billion. He went on to say that "Broad-based principal reduction could result in decreased access to credit and higher cost to consumers because lenders will price for principal forgiveness risk."
Yet one must wonder how accurate these costs are. I would argue that these costs may cover the principal reductions of current borrowers, but how about the majority of the country who are willing and able to make their payments, but start missing payments to qualify under the HAMP program? There is also a deeper morale issue that is raising questions of fairness both to this aforementioned majority and to the banks themselves.
I stand behind Mike Heid of Wells Fargo who said "while very difficult to achieve, the needs and interests of homeowners in financial distress must be balanced with those who've remained current in their mortgage payments."
Unless we choose to change our economic system (which I am against with every fiber of my being), we need to stick to the rules of our current market and let the market balance itself out without any large government hand ordering banks what to do. How unconstitutional it is for a government to stand between two parties who have bound themselves in contract. But I guess that discussion is for another day.
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