Why Banks Are Getting Haircuts

BY Paul Solman  February 22, 2012 at 1:43 PM EDT

Home Foreclosure in Greeley, Colo.
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 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, was voluntary, and a huge disappointment to many, 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!‘ 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- NewsHour’s blog of news and insight.