moral hazard

The U.S. House tonight voted to approve a "mortgage relief" act which now permits a new form of bank robbery.

It's called the "mortgage cramdown".

You see, if the value of the your house has declined in value, now you will be able to file bankruptcy and reduce the principal amount of the debt down to the present, beaten down value.

Then in a few years, when inflation rears its ugly head and the nominal value of homes rises guess what?  The mortgage principal is permanently reduced. And our profligate borrower cashes in on a windfall, while his lender is stuck the removed principal, never to see this money again..

Now, ok , well maybe some poor downtrodden folks deserve some good luck. But, my friends, the U.S. House actually voted to let people who lied on their mortgage application get this relief.  

Writing off mortgage principal to a consenting adult who borrowed more than he should have is simply a bad idea.  It rewards bad behavior. It will only encourage another housing bubble.

I understand the desire to slow the wave of foreclosures and space out the readjustment in the housing markets. And yes, their are honest  folks who can make a go of it. But reduce their interest rates to current market; stretch the loan term; turn the arrearages into a zero interest bullet at maturity. Jeez, there are plenty of fair ways to help a borrower. (not that the servicers for investors like Countrywide try them very often) And that do not cause the borrower to renounce the basic obligation to either pay back the loan or give up the house.

Minnesota's Michelle Bachmann said this bill was   “a tax on all the responsible homeowners. This is the last thing homeowners and our economy need.”   

Let's hope her attitude goes into overdrive in the Senate. We need to find 41 members with non wobbly knees to either fix this bill so it does not reward greedy borrowers or to send the thing back to Barney Frank with a strong message attached.