But it’s interesting that the focus seems to be on principal reduction workouts (of course we’ll have to see the final language to be sure). If that’s the case, then these workouts will should further deflate housing prices. Unlike interest rate reduction loan workouts (which are highly inflationary), principal reductions are deflationary (assuming there are no strings attached… future profit sharing, etc). They are more or less equivalent to a foreclosure where the borrower gets to buy the house back at the foreclosure price instead of getting kicked out on their a$$es. So other than being incredibly unfair, they will not prop up prices. Just imagine how equity-heavy owners are going to feel when they see their spendthrift neighbors, after leveraging themselves to the hilt buying granite countertops and Cadillac Escalades, win the big bailout lottery. And then, to add insult to injury, the neighborhood home prices are STILL going to decline over the years as the bailout recipients start unloading their homes (made possible by their new, low, post-workout cost basis). Want to see some pissed off baby boomers? This should get VERY interesting. I’m sure many were counting on Uncle Sam to inflate away the nation’s debt binge while they rode out the storm protected by their heavy asset holdings (mostly real estate).
