Comments on: Let’s not bail out more subprime lenders A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: Strych09 Tue, 14 Sep 2010 01:04:44 +0000 I understand all of Felix’s points, but I don’t think he quite grasps the extent of moral hazard involved if the banks went for wholesale principal reduction as he advocates in this and previous posts.

From a behavioural finance perspective, if we put in place policies that provided widespread principal reduction, then the next credit bubble attached to real estate would be even more severe, as debtors priced in the value of an expected principal reduction should their mortgage go under water, during bidding on properties. This would drive up prices even faster than they normally would go, hurting the people who we should be helping, people who want to buy a home to live in themselves, rather than speculators and flippers.

Over and above that, and on the philosophical level, I have yet to hear a coherent argument that someone who signs a contract for a mortgage loan should somehow be granted a principal reduction just because they are under wanter. The borrower can always exercise their option to mail in the keys and walk away from the home.

Also, it’s not like borrowers haven’t already been granted special benefits due to the “crisis”, The Mortgage Forgiveness Debt Relief Act of 2007 (known by California mortgage brokers are the “Don’t 1099 Me, Bro” law) already allows debtors to do a short sale and then walk away from the short amount without paying taxes on the forgiven/cancelled portion of the debt. Why isn’t that enough?

By: maynardGkeynes Mon, 13 Sep 2010 14:44:46 +0000 Bravo Felix!!!!