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Wednesday, December 30, 2009

Bad Policy Alert: Bank Mercy Today Means Bank Pain Tomorrow

An article in today's New York Times laments the low percentage of new or modified mortgages given to holders of outstanding mortgages who are seeking modifications -- some three percent according to a cited estimate.

Readers should understand that every modification (think: a favor, or "cutting someone a break") granted by a bank, for whatever reason, altruistic or otherwise, will reduce that bank's ability to make future loans.   After all, the banks' asset bases (also known as the "borrowing base") are finite and their lending ability may become more constrained -- with or without any modifications -- if they are forced to drop their leverage ratios.   The increased leverage above traditional levels has been one prime factor in the banks' recent troubles.

The banks should not be pressured into doing any modifications.   The people really funding today's modifications are the same people who are paying their unmodified loans on time today...and who may be in dire straits tomorrow precisely because they were responsible today, and yesterday, and no one came to their rescue.

Wouldn't it be ironic that the people most at risk of eventually losing their homes will be the ones who initially kept paying their bills on time and in good faith?   After all, there will be a time when the bailouts stop.   Not everyone will get a bailout.   I predict the last ones to run out of money -- the ones who today are paying on time -- will be the losers in this perverse game of musical chairs.   Talk about a moral hazard; such a scenario will teach an entire generation that playing fairly and by the rules is for suckers.   But why talk about fairness -- that's so 20th Century!

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