Friday, March 14, 2008

Bernanke’s Principal Blunder

What we can learn from the Fed Chairman’s recent calls for reductions in the principal of troubled mortgage loans is that he knows little or nothing about the reality of life faced by subprime borrowers.

Hello, Ben – the problem isn’t the principal – it’s the interest.

You’ve adopted the theory that being upside down in a loan makes it so a borrower will want to walk away because they think there’s no equity to lose.

Hello, Ben – the problem is they can’t afford the payments because of the interest rates they got slammed with. They would like to stay living in the house. It is their home. You’re not helping them keep it and foreclosure is the servicer's best financial option.

Have you played with an amortization calculator lately, Ben?

Try a simple one, just to learn how people in the real world see things:

$150,000.00 ARM loan, 360 months 5.5% interest rate for 24 months = $851.68 per month.

After 24 months at that rate, $4,155.25 has been paid into principal. $16,285.16 has been paid in interest. The principal balance is now $145,844.75.

Then the ARM’s interest rate jumps to 11%, so the new payment zooms to $1,379.68, which is $528.00 more per month for the borrower who is already trapped or would have refinanced.

Let’s say Ben’s goofy idea to lower the principal is acceptable to the noteholder (if you can find one!). And let’s knock off 20% of the principal ($145,844.75 becomes $125,844.75). Guess what the payment is now? $1,189.22, which is still $337.54 more the borrower would have to pay per month that they probably don’t have.

And worse, at 11% APR, the borrower is now faced with over $303,000 in interest for their $150,000 loan instead of $130,000. That's still a good deal for the investor, Ben.

Wake up, Ben. The problem isn’t principal. The problem is USURY. Plain and simple. Subprime lending is a usurious, predatory scam, Ben and until you admit that the interest rates are the problem, you’re only perpetuating it.

But anyone with a subprime loan should be able to figure this out too. Anyone who has half a brain should walk away because they’re being scammed by usurious interest rates, not because they’re upside down or close to it.

And if enough of the victims do the smart thing and walk, the subprime industry and your friends on Wall Street will get even more of what they’re getting, and they richly deserve it.

The Honorable Judge Roy Bean

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