Will "Helicopter Ben" become "Bailout Ben"? My initial read of the FOMC Chair’s speech today suggest he will not. But he has asked fro some rather extraordinary actions from banks and other lenders.
What the Chairman proposes are efforts to 1) help distressed borrowers refinance; 2) loss-mitigation arrangement between the lender and the distressed borrower; and 3) the possibility of writing down principle.
That last one really caught my eye. Here’s the money quote:
"In my view, we could also reduce preventable foreclosures if investors acting
in their own self interests were to permit servicers to write down the mortgage
liabilities of borrowers by accepting a short payoff in appropriate
For example, servicers could accept a principal writedown by an
amount at least sufficient to allow the borrower to refinance into a new loan
from another source. A writedown that is sufficient to make borrowers eligible
for a new loan would remove the downside risk to investors of additional
writedowns or a re-default. This arrangement might include a feature that
allows the original investors to share in any future appreciation, as recently
suggested, for example, by the Office of Thrift Supervision. Servicers could
also benefit from greater use of short payoffs, as this approach would simplify
the calculation of expected losses and eliminate the future costs and risks of
retaining the troubled mortgage in the pool." (emphasis added)
That’s pretty astonishing talk from a sitting Fed Chair.
To reiterate, the Chairman of the Federal Reserve is advising financial institutions to take a hit, write down principal, both their own and the common good.
These are indeed strange and interesting days . . .
Reducing Preventable Mortgage Foreclosures
Chairman Ben S. Bernanke
Independent Community Bankers of America Annual Convention, March 4, 2008
As we noted over the weekend (Where Foreclosures > # of Homes Sold), Floyd Norris Off the Charts column covered the fascinating question of where in the country Foreclosures are actually exceeding Home Sales
A Dysfunctional Credit Market
NYT, March 3, 2008, 2:29 pm