Quit While You're Ahead

So I guess big banks are gamblers after all. In a hearing of with the House Financial Services committee a high ranking official from one of the biggest banks in the US, JP Morgan Chase, said that they were pretty much unwilling to reduce the outstanding principal of mortgages, the money owed on the loan not counting interest, because it would reward households for over consumption and taking on more debt than they should have otherwise. Not only that but it was also said that by helping homeowners that owe more money on their homes than what they are currently worth would punish future homeowners by increasing the price of borrowing in the future. Interesting view considering the circumstances. The only reason the housing market has lost so much value it that housing was overvalued, sounds silly, I know. But only big institutions were able to understand that these ever increasing prices in the housing market were due to an unprecedented demand due to low cost of borrowing throughout that period. The Fed had kept interest rates at historically low rates to try and jumpstart the economy after the Dotcom bubble burst and the attacks of 9/11. Throughout our history, and specifically through the last century, homeownership has been one of the staples of financial, as well as family stability. So it would be hard to blame individuals that wanted to own a home and knew they could. The loans were approved. These individuals did not pull any tricks or for the most part cheat when they applied. Banks wanted to approve these loans no matter what. Why? Because they were turning around and selling them to Wall Street at a discount, for example 80% of what they were owed, and they had nothing to do with these loans anymore, they had cash in hand. Wall Street would securitize these loans and sell them as bonds. Now, if the market collapsed most of the risk would be distributed among homeowners and the bondholders. Which is exactly what happened, but the problem was that these two categories covered a big part of the economy. One would think that now that housing has lost so much value and that value is so much lower than the original loan amount, banks who originated the loans would be more willing to negotiate with homeowners to lower those balances to keep this group of solvent individuals from defaulting on loans. The main reasons would be to keep them in their homes and to keep money flow into the banks and the issuers of the loans. If people believe that they have a property that is worth much less than the value of their loan, then there’s really nothing to keep them from walking away from that situation. If more people start walking away from their homes, it will take longer for the housing market to rebound, banks will be stuck with assets that they will have to sell at a huge discount, depressing the housing market even more. I would really hope that these banks, considering they make bets every day, would hedge this bet and go for the option that would benefit the whole of society which would include them. Maybe they know something that most of us don’t which I’m not sure what it could be. If they opt to not restructure loans I would suggest an intense course in Game Theory. But I would really be afraid to suggest anything to these banks that has the word “game” in it.