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The Argument For Mortgage Principal Reduction

Big surprise that yesterday's blog garnered quite a few responses, not just on the page, but from folks here in DC who are involved in all those closed-door negotiations at Administration office buildings.

From one insider:

"The write down would be a more honest way to align values with debt, instead of indirect incentives designed to modify behavior. The administration should temporarily adjust accounting rules to allow banks to amortize the write down so that they do not take an undue capital hit."

This is precisely what House Financial Services Committee Chairman Barney Frank is alluding to, when he wrote, in his letter to the top four second lien lenders (B of A, JP Morgan Chase, Citigroup and Wells Fargo), "Because accounting rules allow holders of these seconds to carry the loans at artificially high values, many refuse to acknowledge the losses and write down the loans, which would allow willing first lien holders to reduce principal and keep borrowers in their homes."

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A source tells me that policy makers at Treasury are discussing a plan to allow accounting flexibility to deal with seconds, but there has been some pushback within the ranks.

I'm also told that Treasury met with some bloggers yesterday (ahem, where was my invitation??), and there was possibly some news committed on principal reduction.

One blogger from eschatonblog.com posted:

In response to a question about Bair's initiative at the FDIC regarding principalreduction plan for loans made by banks that the FDIC has seized, a senior Treasury official said that they should have a similar program with Fannie and Freddie soon. We'll see.

Then from the Huffington Post:

At a background briefing Monday afternoon, a senior Treasury Department official indicated that the department is headed in the direction of writing down mortgage principal more often -- the one thing underwater borrowers need the most. Market observers and consumer advocates have long been calling for such a shift.

But hours later, Treasury spokesman Andrew Williams e-mailed the Huffington Post: "Treasury is NOT poised to roll out a major principal write-down program. As the [official] said, we are looking at a number of tweaks to existing programs to help reach more borrowers."

Questions? Comments? RealtyCheck@cnbc.com

  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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