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Wednesday, February 23, 2011

Mortgage Principal Reductions Mock The Responsible

UPDATE:  The Wall Street Journal reports today that some major mortgage banks have reduced mortgage principal for over 100,000 homeowners. 

Of course, this is paid for...by you and I.  The banks will recoup those reductions -- losses -- by jacking up fees from everyone else doing business with the banks. 

It also raises anew the question of fairness:  Why do some homeowners get a reduction -- the equivalent of free money -- while others have to pay both their full amount and subsidize reductions for others?

This is sparking a crisis of fairness in which average Americans now assume that the major institutions of society (whether public or private) are not fair.  One should expect an increase in antisocial, narcissistic and even criminal behavior as people seek to rationalize this new consciousness of unfairness.

George Orwell could not have said it better in his iconic work Animal Farm.

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Earlier original column:    The Obama Administration is pushing leading banks to settle existing lawsuits over their serious mortgage servicing problems by paying a reported $20 billion to fund mortgage principal reductions.


Reducing your debt principal is the equivalent of giving you money. It's like handing out winning lottery tickets -- free money -- to some, after sticking you with the bill.


This proposal would call for the banks to use their own money to "bear the cost of all writedowns rather than passing them on to other investors." In reality, any cost will be passed on -- eventually and however circuituously -- to shareholders and the customer (depositors and borrowers) -- in the form of:
  • lower savings rates,
  • reduced services,
  • worse customer service,
  • higher fees,
  • shorter payment periods and higher loan interest rates.

All of this, to keep your deadbeat neighbors in their homes (well, that's not really accurate) a little longer.  Crime, Politics and Policy: By Eric Dixon has previously been critical of strategic defaults and suggested criminal penalties might be in order, criticized the underwater borrowers who now assert that they are victims -- when in reality they're victims of their own greed -- and separately has proposed a positive principal reduction program that promises to recapitalize the supposedly- troubled banks and rewards responsible homeowners. 



The Wall Street Journal article (Thursday edition) mentions that bank executives say that "principal cuts don't necessarily improve payment patterns" while they may raise "new complications" like how to decide whose mortgage gets reduced.


The potential for great unfairness and a degradation in the popular belief of an equal, level playing field is held in this proposal.


Eric Dixon is a New York lawyer and strategist who has previously proposed borrower-based mortgage principal reductions in order to capitalize banks and reward responsible, financially healthy homeowners. Mr. Dixon can be reached for further comment at edixon@NYBusinessCounsel.com.

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