Commentary: Rewarding Bad Mortgage Behavior

Does “principal reduction” make you hot under the collar? You’re not the only one. And if you’ve been like 90 percent of Americans who have lived within their means during the last few years of debt-Gomorrah, you are about to get screwed, while the government rewards bad behavior.

The leaders in Washington DC keep repeating the phrase “foreclosure mitigation.” And up until now, that has meant extending payments out over a longer period of time. Turning a 30-year loan into a 50-year loan for example. That reduces the monthly payments so the person can afford to stay in the home. In my opinion, that’s fine. Lowering the interest rate from a reset that would be much higher is another option. I’m less in favor of that, but I’ll throw it in the acceptable bin.

Michelle Caruso-Cabrera
CNBC Anchor

But now suddenly foreclosure mitigation is morphing into “principal reduction.” This means banks, at the governments urging, are reducing the principal of the mortgage. Some members of the government say the principal should be reduced to the current-market value of the home. In fact, members of the government want to incent banks to do this by giving them a bonus for every “foreclosure they mitigate.”

Think this through for a second. Your home value, along with all your neighbors, has gone down in the last year. But now your neighbor, who bought above his means and can’t make the payments, because of a reset to the REAL monthly cost of the loan, is suddenly going to get a gift. Well what about you? You did the right thing. You didn’t get some crappy loan. You didn’t buy above your means. But you are stuck with the full mortgage. This is a classic example of rewarding the worst kind of behavior.

More than 90 percent of all mortgage holders are making their payments. And their thanks for doing so? Having the government use their taxpayer dollars to incentive the banks to give a gift to those few who didn’t.

It’s already happening. Litton loan servicing, a division of Goldman Sachs, is already doing it. Goldman Sachs insists it has nothing to do with the government giving them billions in TARP money.

I’ll take them at their word, for now.

© 2012 CNBC.com