Bernanke Plays Hardball on Mortgages

Fed Chairman Ben Bernanke has told banks to essentially use any means necessary to save borrowers. Furthermore, he says that this will shorten the mortgage crisis.

Speaking to bankers in Orlando, Bernanke said he recognized the role that the Congress should play in stepping up to help borrowers, particularly through federal loan guarantee programs.

However, he said, banks must realize that the way forward is not digging in and waiting for the inevitable -- and costly -- wave of defaults.

"Lenders tell us that they are reluctant to write down principal. They say that if they were to write down the principal and house prices were to fall further, they could feel pressured to write down principal again,” Bernanke said.

In other words, in Bernanke's estimation, banks need to do whatever they can to make sure that struggling borrowers somehow figure out how to make their loans affordable. He says that everything should remain on the table: freezing Adjustable rate mortgages, lowering other rates, and even lowering loan amounts.

This is unprecedented and aggressive and Bernanke has supposed that the way to stabilize the market is to find solutions for these borrowers at all costs.

I disagree entirely and I believe that the only way to stabilize the market is to remove these borrowers from it as soon as possible. They should never have been allowed into the market in the first place and artificially keeping them in homes only prolongs their torture and the uncertainty as well. Whether any of the powers that be choose to admit this or not, most of these borrowers are irresponsible. The facts speak for themselves. (Res ipsa loquitor) They can't afford their mortgages. Some of them have lost their jobs, and others have had other unexpected issues, but most just got into mortgages they couldn't afford. By holding folks like these up, you are simply prolonging the inevitable.

That is the sort of behavior that drags out the mortgage crisis even longer. I believe that this aggressive move by Bernanke will have the exact opposite effect of what he is trying to do.

Furthermore, he is creating a litigation nightmare. He is demanding that banks bend over backwards for their worst borrowers. In other words, the worst borrowers are rewarded the most. If you have been making your payments on time, you get absolutely no consideration. How long before perfect borrowers start to demand the same treatment as the troubled borrowers. If they do, banks will face a litigation nightmare. Every borrower will demand their rate lowered. Not only will this create a moral hazard but frankly class warfare between good and bad borrowers.

Ultimately, in my opinion, the only proper course of action is to let the free market deal with these troubled borrowers. Those that can't make their payments need to be removed from their properties as soon as possible. That way we can remove from the marketplace those borrowers that shouldn't be in it in the first place. Bernanke is doing the exact opposite. He is desperately holding in the marketplace those borrowers that shouldn't have been in it in the first place. I believe this will have catastrophic effects on our economy