Three Federal Reserve economists are out to debunk the theory that reducing principal balances on mortgage loans is a no-cost cure for the housing crisis. The three, Kris Gerardi, Federal Reserve Bank of Atlanta, Chris Foote, and Paul Willen, Federal Reserve Bank of Boston, recently published their paper, The Seductive but Flawed Logic of Principal Reduction, in the Atlanta Fed banks' Real Estate Research Blog.
The idea that a reduction program would cure housing ills has been kicking around since the crisis began and there are now rumors that the administration and states' attorneys general may soon announce a settlement agreement that will require lenders to write down principal balances on troubled loans by as much as $25 billion. Policy wonks, the article says, will probably greet this with glee, but are they right? The authors don't think so....
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Source: http://www.mortgagenewsdaily.com/03112011_loan_modifications.asp
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