The NYT’s Holy War of advocating the reduction of mortgage principal in favor of foreclosures continues.

Its most recent argument appeared July 4th in the form of “So Many Foreclosures, So Little Logic”.

The take away from the article was that “mortgage modifications” (which the Times had previously advocated) have been an unmitigated disaster, and foreclosures will continue to ravage housing prices for years.

The NYT’s solution is to reduce loan principal of mortgages facing foreclosure.  The author observes:

“If banks have written down the value of these loans to the 40 cents on the dollar that they are fetching on foreclosures — the only true value for these homes right now — then why don’t they bite the bullet and reduce the loan amount outstanding for the troubled borrowers?  That type of modification would be far more likely to succeed than larding a borrower who is hopelessly underwater with yet more arrears.”

This sort of rigid, sophomoric, two-dimensional, lack-of-understanding is what marginalizes The New York Times as a source of economic reality and functional ideas.  The author is only able to apply "logic" to the most obvious and visible side of the equation, ignoring the inevitable, indirect results of principal reduction. 

How The New York Times Would Destroy the Housing Market

If banks reduced by 60% the principal balance of mortgages that enter default what would happen?

Why would anyone pay their mortgage when not paying it results in a 60% loan reduction?  Instead of facing foreclosure and wrecked credit, a homeowner would be lavishly rewarded for not servicing their mortgage. 

Lenders would create the expectation of similar treatment for future defaults, and the Housing Market would truly collapse.  Lenders would be unqualified fools to reduce principal on distressed properties.  They would consciously be transforming their mortgages portfolios into non-performing assets worth 40% of current value.  It is infinitely better for lenders, the Housing Market, home prices and the economy if:

• Foreclosures persist
• People who over-borrowed to buy over-valued houses lose them
• The Housing Market continues to clear
• Prices gravitate towards sustainable values relative to market realities

The New York Times constant stream of unrealistic foreclosure-prevention gimmicks continues to be a source of entertainment.  But their ideas demonstrate a lack understanding with respect to the housing market, human nature and economic reality.