Forcing banks to modify mortgage contracts and lend counter to true market forces greatly increases the risk of failure and diverts capital from where it is best used. While it is popular both in media and government circles to target lenders for their role in the mortgage crisis (“Restructuring of mortgage loans gets tougher,” August 24), many lenders have taken significant steps on their own to address the growing number of home foreclosures.
In his article, Craig Andersen criticizes mortgage lenders for not helping enough homeowners readjust their mortgage terms in the face of possible foreclosure. He says the requirements for a renegotiation are too high, and that many homes are lost before help can be acquired. But when a lender is compelled by mandate to renegotiate a mortgage loan, financial capital is lost. This loss of capital weakens the bank’s ability to provide loans to other consumers and further thins out the lending market.
There are no winners when a bank forecloses on a home. It is often in the lender’s best financial interest to keep families in their homes and paying down their mortgage. The best course of action for the government today is to allow the markets to run their course and to continue to allow individual lenders and borrowers to work out loan arrangements on their own. Forcing renegotiation when it is not fiscally sound will only increase the current problem. Where fraud and mismanagement exist, the market will purge the rot in the lending system if left alone.
Matthew Glans ([email protected]) is a legislative specialist for The Heartland Institute.