Principal Reduction: Fair or Welfare?

For those ideologues who blindly call for “personal responsibility” we direct your attention to the tens of billions of subsidies (corporate welfare) given to hundreds of corporation, some of whom act contrary to the interests of the American citizen and U.S. Foreign Policy. Either take the blinders off or admit that you don’t care about the facts. In the last year we gave more money from taxpayers to large corporations than all the social programs combined including social security and medicare and medicaid. Isn’t THAT welfare?

Principal reduction is fair and practical and proper. The failure of attempts to encourage modifications and mediated settlements can be traced to a few simple facts. First, the companies being encouraged to modify or mediate the bloated loan packages sold to homeowners and qualified investors, don’t own the deals. They don’t have any authority and they make more money keeping the loans in default and foreclosing than they could ever make by modifying the loans.

[So if you want a law that actually accomplishes anything, then you would require that those who would attend modification conferences be authorized to make decisions. A mediation process would be preferable because it would require the parties to prove their identity and relationship to the transaction]

Second, principal reduction is actually a misnomer. It should be called fair market valuation. The property was not and never will be worth what it was appraised at, so the mortgage on it will never be worth its nominal value and the investment package purchased by institutional investors as mortgage backed bonds are correspondingly worth far less than how they were rated or valued.

The correction for this fraud is to adopt plans that place the victims as close to their original position as possible before they were tricked into this scheme. Tactically, that would be easiest if the borrowers and the creditors (institutional investors owning MBS) got together, sued the intermediaries who caused all this, collected the proceeds of Federal bailouts, and used it to make the investors whole and force the accounting for the notes and mortgages to be reflected as fair market value.

Sure the homeowners who get a “benefit.” But it is a far cry from welfare when you give back what was taken through deceit. The government is far behind the curve on this and the situation is going to get far worse as people walk from the securitized debt because they can. Why should a homeowner, auto owner, student debtor or credit card debtor pay a party who never advanced the money? Free? No, it would be proper to take the interests of investors and their real debtors into account and develop a formula to return equity to the homeowner and money to the investor.

Tags: authority, fair market valuation, mediation, modification, principal reduction, welfare
Posted in bubble, Corruption, Eviction, securities fraud |