Steve Dibert, MFI-Miami

I have to admit when Bank of America announced last week that they were going to begin issuing principal write downs for a select group of homeowners I was and still am skeptical of anything the banks say will benefit homeowners.  I still believe this announcement by Bank of America is similar to Carnival Barkers luring people into rigged ring tossing tents at travelling carnival.

Then after I made these comments I read a  blog by one of my favorite financial bloggers, Felix Salmon from Reuters. He disagrees with me and believes this the beginning of universal mortgage write downs by the vast majority of mortgage lenders.  I don’t share Felix’s optimism because I have clients who have been burned by the banks by believing what they tell them.

Felix’s optimism is the reason I like his style.  He’s an Englishman who doesn’t blog or write like an stereotypical English finance writer. Most English financial writers dress like the politicians from Stanly Kubrick’s A Clockwork Orange from 1971 and spout outdated Thatcheresque dogma from the 1980s while trashing Americans as if they live high atop some Ivory Tower like Edward Longshanks.

Felix Salmon has shattered that stereotype in a big way.  He understands finance and along with Max Keiser are the two media types in the world that can breakdown very complex financial formulas and explain it so you don’t need a MBA in finance to understand what he’s talking about.  He also writes with a sense of optimism and wonderment that is rare and at one time was considered American.

This why I found his Reuters editorial from last week so fascinating even though I disagree with his overall premise.  He not only breaks down what has gone wrong in the past 4 years but actually gives some common sense approaches to fixing it.   Here’s an excerpt:

So what should happen when people get into trouble making their mortgage payments on a house that is underwater? After 2008, banks tended to do one of two things. They waited for an interminable amount of time, then initiated foreclosure proceedings and kicked the family out of their home. Alternatively, they worked out a mortgage modification that didn’t reduce the amount owed by a single dollar, thereby maximizing the probability of a redefault and of the homeowner’s having to go through the same painful process all over again.

There are multiple ways of doing this better. The simplest is just for the banks to unilaterally reduce the principal amount owed on a mortgage. It’s much more effective, always, for a bank to reduce principal and keep the interest rate constant than it is to do what they tended to do after 2008, which was to keep the principal constant and reduce the interest rate. Why don’t they reduce principal? They don’t because doing so involves writing down the value of the mortgage on their books — something they’re bound to do sooner or later, but which they’d much rather do later than sooner.

You can read the whole article here.  It’s worth the read.