Who pays when mortgages default?

Homes in the U.S. have lost a third of their value, impacting home equity loans or second mortgages. When homes default because homeowners are not making their mortgage payments should the loans be modified by reducing the principal?

Who should take the hit when senior debt or first mortgages are in default? Do the banks or guarantors absorb the losses? Nearly half of all second mortgages are with America’s four big banks.

If you say the guarantors, Fannie Mae and Freddie Mac, should take the hit, taxpayers will be paying for the write down. These agencies in conservatorship, in effect, are financially guaranteed by the government.

Normally second mortgages are written down entirely before first mortgages take a hit. According to a recent Financial Times article, the Obama administration, congressmen and the Federal Reserve are pressuring the Federal Housing Finance Agency, who oversees Fannie and Freddie, to absorb the losses.

That’s right. Our government leaders would rather have taxpayers take the hit rather than the four big banks. Bankers and their lobbyists apparently have our Washington Democratic administration in their back pockets this election year.

Let them know what you think about their devious efforts to influence or direct the Federal Housing Finance Authority in their attempts to take care of the big banks. These banks recently passed government stress tests. Would they have passed if the tests assumed the banks would have to write down these mortgage losses? Since the banks cleared the tests, they immediately resumed dividend payments to their shareholders and also opted to offer share buy backs to enhance shareholder value. Why the hurry?

Let your Congressman know if you think this is fair.

Mike Tennis

Sleepy Hollow