Why Banks Are Getting Haircuts

*Home foreclosure in Greeley, Colo. Photo by Flickr user david_shankbone under a Creative Commons license.* *Paul Solman answers questions from the NewsHour audience on business and economic news here on his [**Making Sen$e**](http://www.pbs.org/newshour/economy/makingsense/) page. Here's Wednesday's query:* **Name: Gordon** **Question:** If a home mortgage is a contract, why, in these times, are the banks not taking a haircut along with the borrowers? If the bank loaned to a government (Greece) via bonds, it has to take a haircut to right the ship. **Paul Solman:** First of all, some 75 percent of mortgages are owned by private investors via mortgage-backed securities. Banks hold the rest, but service all mortgages. That is, they're the collection agents and thus the "bad guys." Truth be told, investors and the banks *have* been taking haircuts. They do on just about every foreclosure, since foreclosed homes tend to be underwater -- worth less than the money loaned against them. In addition, states Attorneys General have now wrested $25 billion from lenders to lower mortgage bills. And President Obama is pushing a program to reduce interest rates on current mortgages, which would mean further haircuts for lenders. We'll see how it all turns out. The president's last mortgage reduction program, [**HAMP**](http://www.pbs.org/newshour/bb/business/july-dec10/mortgage_10-25.html), was voluntary, and [**a huge disappointment to many**](http://www.pbs.org/newshour/rundown/2011/03/obamas-foreclosure-prevention-program-has-bullet-on-its-back.html), if not an infuriating exercise in futility, frustration and even humiliation. Anthropologist/anarchist David Graeber and journalist/activist Lawrence Weschler have been making the same point lately about student loans. See '[**Next Step: Loan Strike!**](http://www.thestranger.com/seattle/next-step-loan-strike/Content?oid=10809798)' as an example. Both are pushing student debt default as the next big step for the Occupy movement. Since there's $1 trillion in student debt outstanding in the United States, compared to about $800 billion in credit card debt, the potential for haircuts here could be substantial. We're reporting on this story for an upcoming NewsHour piece. *This entry is cross-posted on the [**Rundown**](http://www.pbs.org/newshour/rundown/)- NewsHour's blog of news and insight.*

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