Mortgage Principal Writedown Endorsed By Government

Diana Olick’s latest column puts “principal writedown” in perspective: “The government is officially giving borrowers back home equity.

Yep, somewhere between $35 and $50 billion worth. Of course we’ve all lost over $5 trillion, but who’s counting? Lenders still aren’t required to do it, but they’re going to get an awful lot of taxpayer-funded incentives to do it€¦Let’s face it, the underwater issue (that is borrowers owing more on their loans than their homes are worth) is now far bigger than the subprime issue and the unemployment issue. Yes, it’s concentrated heavily in five states, but it still manages to plague home prices nationwide. People are walking away in greater numbers than ever before, and people who want to stay are unable to get into modification programs because of their overwhelming negative equity. Yesterday, before the House Oversight Committee, Treasury Secretary Herb Allison said his concern with principal write down was

1) expense,

2) fairness, and

3) moral hazard.

I asked him this morning what had changed overnight? ‘The moral hazard aspects are mitigated by the structure of the programs.’ I’m not entirely sure what that means, although I’m sure many smart people behind closed White House doors came up with that exact phrase. I guess it means that because borrowers and servicers have to earn the write down incentives over three years that it’s fair. Or maybe because it helps keeps borrowers out of foreclosure, thereby stabilizing home prices around them, that it’s fair. Or maybe because the servicers and investors have to bear some cost, that it’s fair. Maybe it’s just that there is simply no other way to get ourselves out from under this mess than to forget all the bad choices some lenders and borrowers made and give them a fresh start. And for those of us who acted responsibly? No pain no gain. As I tell my kids every day, life isn’t fair.”

What do you think? Will this help the economy or only a few people who are under water? What does this do for us as investors?