“PEOPLE PUT ME DOWN ‘CAUSE THAT’S THE SIDE OF TOWN I WAS BORN IN”

10/1/09

This morning’s (i.e., Thursday, 10/1’s) Wall Street Journal reports that, after months (years now) of modifying home loans by reducing interest rates and extending terms, and not meeting much success doing so, banks and other loan servicers have begun reducing the principal on such loans with some degree of seriousness. Indeed, in the second quarter of 2009, 10% of loan modifications involved writing down principal, up from 3.1% in the first quarter of 2009.

The banks’ newfound enthusiasm for writing down loan principal springs partly from the utter failure of other types of modifications. The Journal reports that 28% of loans modified in the first quarter of this year were in default within three months. (THREE MONTHS!) But it’s even worse than that; 56% of loans modified in the second quarter of 2008 were in default again a year later. Maybe, the banks think, reducing principal will prove more effective. Good luck on that.

The real reason, though, for the banks’ ramping up principal reductions is, as the Journal reports, “…prodding from the Obama administration which has made saving homeowners from foreclosure a cornerstone of its economic rescue strategy.”

So let’s outline what’s going on here:

The Bush/Obama administration has shoveled billions of your dollars into banks and other financial institutions and effectively told them to use a substantial chunk of that money to modify home loans for those who bought more house than they could afford. Since initial efforts to keep “homeowners” in their houses have failed, further pressure from the Bush/Obama administration has resulted in these lenders’ forgiving principal on loans extended to people who bought too much house. Therefore, the net result is that the government is using the money of those prudent enough to live within their means to subsidize those who whose profligacy, silliness, economic illiteracy, and gormless desire for “status” led them to buy far more house than they could afford. Ironically, this Bush/Obama policy has, in many cases, resulted in your subsidizing your former neighbors who could no longer bear the ignominy of having to live in your neighborhood because those pathetic boondocks were not sufficiently “upscale” for their tastes.

More of your government at work.