Get ready for a showdown between the Obama administration and the banking industry over the mortgage market. Described as a "shock and awe" approach, the White House wants the nation's five largest banks to reduce the principle on mortgages in an effort to reduce monthly payments for struggling homewoners, reports the Huffington Post.
The White House hopes the plan will take effect in the next six months may cover as many as three million distressed homeowners. This new modified mortgage plan could cost Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial as much as $30 billion, according to unnamed sources cited in the Huffington Post report.
"The banks are going to fight this tooth and nail," says Paul Muolo, executive editor of National Mortgage News and author of "Chain of Blame: How Wall Street Cause the Mortgage and Credit Crisis."
If implemented the plan will lead to a "horrible precedent for the industry," he tells Aaron and Henry in the accompanying clip.
Muolo raises two key problems with the plan:
Legality "There's something called rule of law. The mortgage contracts are legal contracts and there's nothing in those original loan documents that say they should write-down the principle in the event of a default," he argues.
Not a Solution Like the White house's first attempt at this - HAMP - Muolo says there's no reason to believe a principle write-down will prevent foreclosures, just delay them.
Nearing a Bottom?
The key to finding a bottom in the housing market is not government intervention, it's employment, Muolo argues. "If you want to help someone with their mortgage, help them with their job, get them back to work and they'll pay their mortgage," he says.
The good news is, we are getting closer to that bottom. Muolo estimates the balance between supply and demand may tip back to sellers in the next year or so. We're closer to a healthy equilibrium judging by the February housing starts data released today. Home construction dropped 22.5% last month to a seasonally adjusted 479,000 homes - the lowest level since April 2009 and the second-lowest on the books.