To Forgive or Not to Forgive, that is the question

The New York Times reports that the debate over whether to reduce the principle on mortgages is raging again in Washington. On one side of the debate is the White House and Democrats in Congress pushing for principle reduction. On the other side is the Director of the Federal Housing Finance Agency who has traditionally been opposed to reducing principle. One of the main issues is which course of action is cheaper for the taxpayers?

Another issue is what about properties with multiple lines or mortgages? If the principle were reduced on the first mortgage, that would be a huge benefit to the bank holding the second mortgage. If the principle were reduced on the first mortgage should the second automatically be wiped out? For those of you reading this blog, you already know that a second mortgage can be stripped in a Chapter 13 in some circumstances. However that process is both painful for the Debtor and takes 5 years for the 2nd to truly be stripped – and does nothing about the principle on the first mortgage.

Both sides agree that the housing market is a drag on the economic recovery. The question remains, what to do about it?