Word: principall
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So far, the government has focused on trickle-down solutions: dealing with complicated assets like mortgage-based securities in the hopes of stabilizing the values of more concrete assets, like homes. In contrast, my approach addresses the root of the problem. Thus the government would help ensure that the mortgage...
Why lower the principal of the mortgages instead of reducing the interest rates of the loans? Because it creates far more incentive for homeowners to continue making mortgage payments. Moreover, with all the exotic loans out there, many with adjustable rates, the principal is the only standard across all mortgages...
Further, there is currently a crisis of confidence in the banking world. Because of the uncertainty surrounding the future of asset values and the prices of complicated derivatives like mortgage-based securities, banks are hoarding money. They lack the confidence even to lend to one another. Reducing mortgage principal addresses...
Implementation is the most difficult part of this proposal. While many financial institutions would immediately discount the plan, ultimately persuading them to accept it is not unreasonable. It is true that for those institutions that hold physical mortgages, their maximum potential profit will go down. For a 30% decrease in...
It is also true that the banks will probably want to discriminate: Why should they lower the principal on "good" mortgages? Why not just on those that are most likely to be foreclosed on? Thanks to the way the debts have been bundled and then cut into tranches, the good...