'Marketplace' Report: Principal Reductions

MADELEINE BRAND, host:

From NPR News, this is DAY TO DAY. Federal Reserve Chairman Ben Bernanke has a warning for banks. He said today that banks need to negotiate with borrowers who are having trouble paying their mortgages. In a speech to a banker's group in Florida, Bernanke cautioned that their mortgage headaches are only going to increase. MARKETPLACE's Nancy Marshall-Genzer is here now. And Nancy, what exactly does Bernanke want the banks to do?

NANCY MARSHALL-GENZER: Well, Madeleine, he wants them to renegotiate the terms of people's loans. Now, that can mean a couple things. The bank could change people's payment schedules, freeze their interest rates or even reduce the loan, reduce the amount of money owed to the bank.

BRAND: Reduce the loan? How is that going over in the banking world?

MARSHALL-GENZER: Well, not too well, although some banks are already doing this. In some areas, they have no choice, where home prices are plummeting and a lot of homeowners actually owe more on their home loans than their houses are worth. And so Bernanke is telling the banks: Hey guys, cut your losses. Make a deal with these borrowers. Otherwise, they're going to walk.

I spoke with Global Insight economist Brian Bethune today, and he said that is definitely happening in some areas.

Mr. BRIAN BETHUNE (Economist, Global Insight): You know, if they have to take another job or they don't have a strong attachment to their community or to the workforce, then leaving the house and moving away and starting up somewhere else is definitely an option they're looking at.

BRAND: So Nancy, could Bernanke require banks to cut these deals with borrowers?

MARSHALL-GENZER: No. This is strictly voluntary. Now, the Bush administration is trying to give banks an option, and the White House thinks if we get banks involved early, they will help limit foreclosures. So it's kind of a market solution.

BRAND: So Bernanke has this proposal, and then there's a proposal out of Congress, which is considering getting banks to cut deals with homeowners. How are they similar or different?

MARSHALL-GENZER: They're very different. The White House proposal is voluntary. Congress's proposal would actually allow bankruptcy judges to change the terms of a loan. A judge could reduce the amount a borrower actually owes. And this is a known as a cram-down in the banking industry, and they do feel this legislation would be crammed down their throats. They're fighting it tooth and nail.

Another economist I talked to today, Gus Faucher of Moody's Economy.com, says banks much prefer Bernanke's voluntary program to what Congress is proposing.

Ms. GUS FAUCHER (Economist, Moody's Economy.com): They don't want to be forced to take a write-down. You know, they'd rather try to work something out with the borrower to see if there's a way that they can get some of that money back.

BRAND: And Nancy, what's the status of that legislation in Congress?

MARSHALL-GENZER: Well, Madeleine, they passed the House Judiciary Committee back in December, but it has not yet been scheduled for a vote on the House floor. There's a similar bill in the Senate. It is on the Senate Judiciary Committee scheduled for this Thursday. Democrats had wanted to debate it last week, but instead they got off track on a debate on Iraq. So now it probably won't reach the Senate floor until April.

BRAND: Thank you, Nancy. That's Nancy Marshall-Genzer of Public Radio's daily business show, MARKETPLACE. Transcript provided by NPR, Copyright National Public Radio.