Mortgage modification a tricky issue for banks, lawmakers

While the top banks are more than willing to publicize their efforts to temporarily halt home foreclosures, they've been less willing to take longer-term action. A reality that many regulators have obviously come around to. A new Obama Administration effort to cut back on the number of expected foreclosures--expected to be announced Wednesday--will likely include some measures to pressure banks to do more, and they might not necessarily be all that bank-friendly. 

People have been speculating for a while now about the legislation that would give bankruptcy judges the ability to restructure mortgages and reduce a borrower's payments. Banks were bitterly opposed to such a measure. But recall that after the government's massive injection into Citi, it was forced to change its tune, in public anyway. But no one is that naive. The industry abhors such proposals. 

No matter what your view, the sense is that the industry really needs to be prodded, and the government is in a position to do that. If the TARP banks were really on their game here, they would have suggested some proposals that head off federal action. Why invite additional, burdensome rules and regs? 

Banks certainly have good reason to want to minimize "cramdowns" and waves of modifications. As Business Week notes, their views in part stem from the tricky "accounting nuances." If a bank "lowered the balance of a certain mortgage, there would be a strong argument that it would have to reduce the value on its balance sheet of all similar mortgages in the same geographic area to reflect the danger that the region had hit an economic slump. Under this stringent approach, financial industry mortgage-related losses could far surpass even the grim $1.1 trillion estimated by Goldman Sachs." 

But they are really swimming against the tide of public opinion. We'll soon know if the banks would have been much better off generating their own modification plan. - Jim

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