In yet another example that the government has gone mad, Sheila Bair, Chairwoman of the FDIC, is looking at a trial program to reduce the principal for homeowners who owe more than their home is worth.
Under the FDIC program, borrowers would be eligible for a reduction in their mortgage balances if they kept up their payments on the mortgage over a long period. … “We’re thinking about it in terms of earned principal forgiveness. If you stay current on your mortgage, you would earn a principal reduction. It would only be for loans significantly underwater,” said FDIC Chairman Sheila C. Bair.
The program would … apply only to loans acquired from a failed bank seized by the FDIC. That would be less than 1 percent of mortgages currently outstanding.
This is wrong on so many levels. One, homeowners will default in mass if they see the government lower their mortgage balance without any consequence. Second, this only drags out the correction. As hard as it is to hear, foreclosure and short sales are a good thing. California is a prime example. They actually have a real estate market with some life due to the price drops. The market is finding buyers; realtors and mortgage brokers have steady work; new homeowners are taking care of the property (rather than having homes disheveled due to neglect); the state is receiving property taxes on time; and the market is coming to life. Does this mean those who can’t afford their home are losing them…yes. These are the people that should experience the loss on the home, not the taxpayers. I feel for these people; I really do. They probably got pushed into a home by a realtor who told them they needed to buy before being priced out. Or, they probably had a mortgage broker sell them an exotic mortgage without really explaining what could go wrong. In the end, it is their responsibility to understand what they are doing. This is a $300,000 purchase, not a $358 laptop. Spend some time learning about buying a home. You can get a book at the library for free.
Ultimately, this will be a positive life lesson for these folks. They will become more financially literate. If we just forgive their principal, they will remain ignorant and expect the government to step in anytime they have a financial difficulty.