Mortgage Loan Plans are Making Banks Unhappy

Head in Hands
Creative Commons License photo credit: Alex E. Proimos

Most banks aren’t very happy with the Obama Administration right now, and that’s mostly because of suggested changes that would require the banks to modify mortgage loans for troubled borrowers. There have already been a lot of loan modifications, but other changes would mean that the principal amount would be reduced for a lot of these borrowers. That’s great news for them, but it’s troubling for the banks. They were expecting a certain amount of money for the loans that they made, and they will take huge losses if they have to forgive a lot of the principal for a large number of borrowers.

The banks generally don’t think that doing that will really help the housing market and the economy, but there are always differences of opinion with that. It’s uncertain what type of settlement will eventually be reached, but it’s clear that something has to be done. There are still many borrowers who are upside down in their houses, and some of them want to sell. Others want to stay in their homes, but they’re having trouble making the payments and they’re annoyed about paying so much on a house that’s currently worth considerably less than they owe. If they had their principal reduced to the value of the house, they would have a much lower payment and could afford to stay there.

If these borrowers see their payments and principal reduced, though, it’s likely that people who aren’t having trouble making their house payments will ask why they don’t also get a reduction. It could cause a huge snowball effect when it comes to problems between banks and their borrowers, which could cause further problems in the housing market and in the economy overall. That needs to be avoided, but the big question is what would be the best way in which to accomplish that.