Friday, Jan 08, 2010
More bailouts for people who over extended themselves - where will it end? What about moral hazard?
Bloomberg: Principal Cuts on Lender Menus as Foreclosures Rise
Some lenders may be coming around to the idea of principal reduction. “If you can right-size the mortgage and return to an equity situation, the incentive is to stay,”
Not content with record low interest rates, homeowners now look set to have their principle loans reduced!
Posted by tyrellcorporation @ 02:55 PM (1381 views) Add Comment
14 Comments
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1. fjcruiser said...
who will benefit when thousand of people are made homeless ? No one. You will have to re-house these people anyway so the cost to society will be even greater as these homes may need to be made fit for living (which will cost money) orif people have to move to badly maintained properties, they will not be looking after it as they would if they owned it.
Punishing the victims will not solve the issue. Better to work out an affordable rent for these defaulters.
2. tyrellcorporation said...
Ever heard of creative destruction Cruiser. Yes there's a hard lesson to be learned but as someone is ejected from their house for making a bluddy bad call I'd be waiting with some cash to buy it - therefore the market gets supported and can grow sustainably again. If I stopped paying my £1000 a month rent, the landlord would chuck me out in a second and I'd be homeless - boo-hoo. I don't suppose you'd advocate giving up some of your taxes to help me stay in my nice house, you'd expect me to rent a much smaller place and reduce my costs.
3. magnaman said...
2. Here, here....ultimately the banks are not considering this because of any moral issue - they just don't want to end up with a portfolio of deteriorating wrecks - on the other hand, in the UK, why not ask the BoE to buy them and rent back to defaulting mortgagors?
4. cynicalsoothsayer said...
5. will said...
If the principal loan is reduced this will eventually lead to further falls in house prices.
6. fallingbuzzard said...
The flaw in this overall approach is to assume that the mortgage payment is the problem debt. In most repo situations here and in the US, the mortgage is but one of many debts and usually the most reasonable of the lot. In the UK most of these unsecured debts are quickly secured onto a property when a borrower is in trouble. Chances of getting all those lenders to agree on a % debt reduction and how it should be split among the debtors is very unlikely. You could always drop £10k in their back gardens, although chances are they'd still be in a repo situation 6 months later.
7. drewster said...
What tyrellcorporation says. For every unfortunate family who lose their house, there is another fortunate family who get to buy that house at a decent price.
The general idea of "principal cuts" is sound. For the banks, it avoids the messy business of actually evicting people and selling the house on. In practice though, if a borrower can't afford their monthly repayments it's usually because they have lost their job. Cutting 10-20% off the principal doesn't help much if the borrower has suffered a 90% loss in income.
I don't know if banks in the UK will go down this route (assuming there is some kind of HPC). They were burned before with IVAs - a similar idea to "principal cuts" - and will probably be less kind this time.
8. rumble said...
Socialism/saviourism nurtures moral hazard in corporations, in individuals.
9. waitingtobuy said...
Tyrell has got it right on the button! well done.
10. magnifico said...
Yes I agree waitingtobuy Tyrellcorporation is spot on. I cannot bear this biased approach in defense of homeownerism. These are the people who would smugly crow over "how much they made" since commiting to their enourmous debt and would look down on prudent folks who "lacked the guts" to jump on the bandwagon of reckless orgy of debt and equity release.
11. markj69 str05 said...
What strange times we live in, where the 'reckless are rewarded' and the 'sensible suffer'.
The whole 'rotten to the core', depraved, and fraudulent financial, economic, and governing systems seam too surreal.
Tyrell - Excellent commenting.
12. alan said...
And the prognosis for the patient....
"The foreclosure crisis is likely to deepen this year in part because payments on many adjustable-rate mortgages are set to balloon. Unless there’s a sharp recovery in property values or a change in lenders’ willingness to cut principal, at least 7 million borrowers currently behind on their payments will lose their homes, Goodman estimates".
Could this happen to the UK ?
13. quiet guy said...
@alan
'Could this happen to the UK ?'
I'd have to say no because the UK market is significantly different from the US one. To the best of my knowledge, there's nothing like an adjustable-rate mortgage in the UK. In an ARM mortgage, the borrower did not pay enough to reduce the debt in the expectation that the price would rise and another ARM mortgage could be renegotiated in, typically, two years. Of course, now the payments will 'balloon' because they will rise to normal repayment rates which the borrowers could never have afforded.
The UK market looks primed for drops but homeownerism is strong ...
14. a saver said...
Why aren't banks being made to reroute their whopping bonuses into mitigating losses on bad loans?