CHARLOTTE, N.C. — While Federal Reserve Chairman Ben Bernanke wants banks to lighten the debt load of distressed home owners, the unspoken question remains: Who pays the tab?
Many financial firms are already lowering the amount of loans to people facing foreclosure, albeit on a small scale. It sounds palatable on Main Street, but someone on Wall Street will have to swallow the losses.
“If you reduce the principal, obviously somebody will have to take those losses,” said Roberto Quercia, director of the Center for Community Capital at the University of North Carolina at Chapel Hill. “Who that is, like if the losses could be spread about many stakeholders, is the more difficult decision.”
Bernanke on Tuesday urged financial institutions to do more to provide relief to struggling homeowners. He suggested increasing the practice of principal reductions, when banks write down loans if borrowers owe more than their underlying property value.
“We think it makes sense to look at. Anything that will help keep people in their homes,” said Tom Kelly, spokesman for JPMorgan Chase &Co., who added that the New York-based bank already practices principal reductions on a “very limited basis.”
He said Chase has worked hard on loan modifications and refinances and begun to review the feasibility of principal reductions for pooled loans.
But any proposal about principal reductions must “balance the interests of investors who own the loans and the borrowers’ needs for a sustainable mortgage,” Kelly said.
Gary Townsend, president of private investment group Hill-Townsend Capital, said it may be difficult for banks to “shoulder any added cost,” because so many have experienced losses because of bad investments as a housing slump and weakening credit markets ensued.
In 2007, the financial services industry wrote down more than $159 billion related to losses in credit and lending portfolios.
This year isn’t looking any better, as industry analysts forecast additional write-downs for mortgages and other bank debts in the first quarter.
Bernanke echoed those warnings Tuesday, saying that foreclosures and late payments on home loans will likely rise “for a while longer” even with relief efforts under way by industry and government.
Steve Bartlett, chief executive of the Financial Services Roundtable said Bernanke’s remarks will help create a better outcome for all homeowners.
“When lenders offer a loan modification to the borrower, it tends to lead to less losses than if a home went into foreclosure,” said Bartlett, whose industry group on Monday announced that lenders have helped more than 1 million troubled borrowers from last July through January.
Talk to us
> Give us your news tips.
> Send us a letter to the editor.
> More Herald contact information.
