It’s The Principal, Stupid! Fed Chair Bernanke Wants Lenders To Slash Their Loans

Want to know just how bad the mortgage / housing / credit / banking / securities / oil / crisis has become? Okay. When was the last time you heard a high ranking government official actually call for lenders to slash the amount of their loans…NOT the interest, the principal!

That is exactly what Federal Reserve Chairman Ben Bernanke has done–called for a reduction in actual loan amounts in order to try and contain the current economic crisis.

“This situation,” said Bernanke, “calls for a vigorous response.”

Duh!

Let’s see why this might be, shall we?

The Fed Chairman himself is warning that mortgage delinquences and foreclosures are more than likely on the way up, not down.

In 2008, about one and a half million subprime loans with adjustable rates are slated to reset to higher rates.

Banks and other lending institutions continue to take a beating from what began as a mortgage crisis.

The stock market is more depressing than a White House position paper.

Oil and now gas prices are rising to levels not seen since the 1980s–and, adjusted for inflation, are actually higher now than before.

So, no wonder the government–even this one–is really getting worried now. Finally.

Which brings us to Bernanke’s proposal: “Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foresclosure,” he says.

Talk About Tough Sells

Asking lenders to actually write down principal is a bit like asking a very hungry lion to take a pass on a big chunk of fresh meat.

But, Bernanke may have hit upon at least part of the solution to this growing problem.

And, then, too, there is the animosity factor to consider. People who took out mortgages they could afford may really get angry if those who took out mortgages they couldn’t afford walk away from the table with lowered principal!

Some hard decisions clearly must be made. But, do our politicians in Washington have the guts to make these decisions? D.C.’s record can not offer encouragement on this front, yet, there does seem to be a growing recognition that we are in the middle of a global, largely U.S. caused, economic mess. This calls for emergency measures that would have been unthinkable in this country just a few months ago.

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Tags: Ben-Bernanke, federal reserve chairman, Foreclosures, principal, subprime mortgages, The Fed