Something has been missing from the economy's alleged recovery. Despite assertions that Americans are paying off their debt overhangs, our great nation's debt/GDP ratio still rises. Home mortgages remain a large part of this indebtedness with little hope for relief in sight. The federal agency charged with overseeing Fannie and Freddie warns us that mortgage writedowns will require massive capital injections from the taxpayer. Forbearance preserves the GSEs' balance sheets at the expense of household balance sheets. This in turn preserves the balance sheets of asset management firms and their hedge fund and pension fund clients who own mortgage-backed securities. Credit Suisse provides a bit of a theoretical assist by arguing that mass principal writedowns won't help homeowners. That argument is a bit too clever. Writedowns may not help homeowners borrow in the future to keep lenders like Credit Suisse profitable, but they have potential to help in the present by preventing defaults and thus keeping non-performing properties off of bank balance sheets.
Writedowns do cause pain. They can wreck homeowners' credit ratings, but this can deter them from future borrowing that may prove unhealthy. They wreck the MBS/CDO holdings of investment funds, which in turn means pension plans will be underfunded and fixed-income retirees will get smaller checks. There is no free lunch in a nation carrying many forms of massive debt.
Mortgage principal writedowns can sometimes be a fair thing to do. They preserve the legal essence of a debt contract and assure the creditor that at least some of the outstanding principal can be repaid, and let an underwater homeowner stay in their house. Sovereign debtors do it all the time with their bonds. Greece is negotiating haircuts right now with European banks that own its debt. If it's good enough for nations, it can be good enough for homeowners too. Someday creditors will learn not to loan money to borrowers - be they nations or households - who have no hope of paying it back. Until then, writedowns can take some sting out of poor lending decisions and allow parties to save face.
Nota bene: I do not owe any long-term debt, and I do not carry revolving credit card debt because I pay my bills in full as they come due. I cannot benefit in any way from mortgage writedowns because I have never taken out a mortgage.
Writedowns do cause pain. They can wreck homeowners' credit ratings, but this can deter them from future borrowing that may prove unhealthy. They wreck the MBS/CDO holdings of investment funds, which in turn means pension plans will be underfunded and fixed-income retirees will get smaller checks. There is no free lunch in a nation carrying many forms of massive debt.
Mortgage principal writedowns can sometimes be a fair thing to do. They preserve the legal essence of a debt contract and assure the creditor that at least some of the outstanding principal can be repaid, and let an underwater homeowner stay in their house. Sovereign debtors do it all the time with their bonds. Greece is negotiating haircuts right now with European banks that own its debt. If it's good enough for nations, it can be good enough for homeowners too. Someday creditors will learn not to loan money to borrowers - be they nations or households - who have no hope of paying it back. Until then, writedowns can take some sting out of poor lending decisions and allow parties to save face.
Nota bene: I do not owe any long-term debt, and I do not carry revolving credit card debt because I pay my bills in full as they come due. I cannot benefit in any way from mortgage writedowns because I have never taken out a mortgage.
