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Wednesday, March 9, 2011

All or Nothing On Principal Mortgage Reductions

The need to treat responsible borrowers and homeowners fairly has been cited by bank leaders resisting Obama Administration pressure to modify or reduce the principal on residential mortgages in the hope of reducing foreclosures and creating price support for the housing market.


Read why Crime, Politics and Policy thinks the phase-out of the 30-year mortgage will crash the housing market here.


The banks are being purely selfish and are not being altruistic.  That is a good thing.  There is no altruism here.  However, the banks' primary responsibilities lie with depositors, counterparties with which the banks are contractually bound, borrowers, and shareholders.  The banks are looking out for themselves...and the people to whom the banks owe responsibilities.  In turn, that helps the banks maintain a flow of credit, helping the rest of us.


Read Eric Dixon's alternative proposal to let responsible, financially-stable homeowners get principal reductions while helping recapitalize the banks. 


If the banks are going to modify mortgages by reducing principal, it is grossly unfair to reduce the principal for some, but not all, borrowers.  It is unfair to reduce the outstanding debt for homeowners, but not for other borrowers on, say, car loans.  What about school debt?  What about credit card debt? 


Our society needs fairness as the foundation of the social contract. Unequal treatment risks a moral hazard that threatens to encourage socially irresponsible behavior and, even worse, to give moral authority to those who wish to engage in it.


Eric Dixon is a New York lawyer, strategic analyst and political consultant.  Mr. Dixon can be reached at 917-696-2442 and by e-mail at edixon@NYBusinessCounsel.com.




 

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