In a recent blog entry, I shared my own little rant on the subject of mortgage modifications — one of many proposals to help rescue distressed homeowners whose mortgage payments are crippling their finances. I’m apparently not alone — it turns out JPMorgan Chase mortgage executive David Lowman also has some concerns.
“Like all loans, mortgage contracts are based on a promise to repay money borrowed. … Importantly, there is no provision in the mortgage contract, express or implied, that the lender will restore equity or reduce the repayment amount if the value of the collateral — be it a home, a car or a stock market investment — depreciates.
“If we re-write the mortgage contract retroactively to restore equity to any mortgage borrower because the value of his or her home declined, what responsible lender will take the equity risk of financing mortgages in the future? What responsible regulator would want lenders to take such risk?”
Nicely put, sir.
I’m in a real quandary here, because conceptually I don’t like the idea of widespread principle reductions… I think it’s a GREAT short-term solution, and would provide amazing relief to a lot of financially doomed people. But long term, I worry that it sets a bad precedent and will fundamentally change the mortgage industry as we know it.
On the other hand, maybe that’s not such a bad thing after all. Maybe the era of easy mortgages is why we find ourselves in this particular mess right now… Maybe you SHOULD have to save up a ton of money before you buy a home, to demonstrate to lenders that you are serious and committed to making it work.
Maybe it was just too easy to jump into a mortgage with little-or-no savings invested in the purchase, and thus little reason not to walk away from the home when things get tough. Maybe we need to make it difficult and expensive to purchase a home.
Easy for me to say, now that I’ve already gotten in, isn’t it?