Bernanke to Banks: Take the Hit

Tuesday, March 04, 2008 | 05:30 PM

Will "Helicopter Ben" become "Bailout Ben"? My initial read of the FOMC Chair's speech today suggest he will not. But he has asked fro some rather extraordinary actions from banks and other lenders.

What the Chairman proposes are efforts to 1) help distressed borrowers refinance; 2) loss-mitigation arrangement between the lender and the distressed borrower; and 3) the possibility of writing down principle.

That last one really caught my eye. Here's the money quote:

"In my view, we could also reduce preventable foreclosures if investors acting in their own self interests were to permit servicers to write down the mortgage liabilities of borrowers by accepting a short payoff in appropriate circumstances

For example, servicers could accept a principal writedown by an amount at least sufficient to allow the borrower to refinance into a new loan from another source.  A writedown that is sufficient to make borrowers eligible for a new loan would remove the downside risk to investors of additional writedowns or a re-default.  This arrangement might include a feature that allows the original investors to share in any future appreciation, as recently suggested, for example, by the Office of Thrift Supervision.  Servicers could also benefit from greater use of short payoffs, as this approach would simplify the calculation of expected losses and eliminate the future costs and risks of retaining the troubled mortgage in the pool." (emphasis added)

That's pretty astonishing talk from a sitting Fed Chair.

To reiterate, the Chairman of the Federal Reserve is advising financial institutions to take a hit, write down principal, both their own and the common good.

These are indeed strange and interesting days . . .


Reducing Preventable Mortgage Foreclosures
Chairman Ben S. Bernanke
Independent Community Bankers of America Annual Convention, March 4, 2008

Tuesday, March 04, 2008 | 05:30 PM | Permalink | Comments (58) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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as crazy Tom Berenger says to the wounded soldier in Platoon: "take the pain. TAKE THE PAIN!!!!"

Posted by: scorpio | Mar 4, 2008 5:30:03 PM

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