I’ll start with what’s good about the idea, but quickly roll into the bad news. What’s good: smart lenders often work with borrowers who are in difficulty. This is not called generosity; it’s called being greedy while recognizing how much the borrower can pay. The mortgage industry created these securities that are not well set up for negotiating terms with delinquent borrowers. Some common standards may help.
Here’s what’s bad: the Bush administration’s and Congress’s involvement. This has the effect of the government telling lenders to change the terms of their deals after the fact. The result will be higher mortgage rates for ALL borrowers in the future. Mortgage lenders now know that in the future, they will be under pressure to be more lenient. Fine, they’ll say. We’ll price some leniency into the terms of all mortgages. That means you and I will have to pay more in the future, even if we are high-rated credits with substantial down payments. The contracts are no longer sacred. Property rights are no longer inviolable. And everything has to cost more because of it.
The size of the problem? Not huge. For top rated borrowers, a quarter of a percent will probably cover the risk. But that’s not good for the economy, even if it’s not big enough to sink it.