Thursday, July 10, 2008

Is Reducing Principal a good principle ?

Ben Bernanke announced on 5th of May in New York ( that in order to reduce the number of foreclosures, he would encourage banks to reduce the principal amount from the under-performing mortgages or which are behind payments.

In a way this was already happening in two ways:

Hedge Funds are buying under-performing notes from banks at 40-50 cents on a dollar. They then negotiate with the homeowners and reduce their principal if they start making payments on time.

Also, Banks are allowing homeowners to do short-sale of their properties. In this case, a homeowner who is falling behind in his mortgage payments is allowed to sell his property at a very low price, with the bank agreeing not to go after the balance amount of the mortgage.

With the Fed also stepping in and with so many options to take advantage, it seems that homeowners who are falling behind their payments have not only a secure financial future, but a bright financial future.

The brightest among them are those who maxed out their home equity lines buying cars and other capital goods.

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