[quote sdrealtor]
The bank is avoiding a loss and his interest rate is being subsidized but no where near $200K. Part of the process he went through involves the bank making a NPV calculation. If it was better to liquidate they would have done that but the asset is more valuable to them and hence tax payers by keeping this one on the books.
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The first statement is not accurate. The loss would be nowhere near $200K on a property that has a current value of $400K. The bank is taking a partial loss in the loan negotiation. The second two sentences are much more accurate of what is really going on. The only problem is that the fed is tampering in these steps with the blind intent of ‘we got to keep those people in those houses’. To do this, the fed is putting their finger on the scale when the bank is weighing whether there is a better outcome on liquidation or renegotiation of the loan. The cost of this is carried by the taxpayers and is being done quite opaquely – contrary to the ‘promise’ of the current administration.
Unfortunately, one aspect of the costs of supporting current house prices is being ignored by the fed. If the price of housing is kept at the current high percentage of available income, less discretionary income is available for other things. ie. to support other businesses other than banks, retirement, health care. It also causes a higher barrier to entry for new homeowners.
Using a metaphore: Congress has forgotten one thing. You can’t increase the size of one piece of the pie without reducing the size of other pieces unless you work on increasing the total size of the pie..
