Monday, February 16, 2009

Lowering principal on mortgage payments

Will lowering principal on mortgage payments alleviate the housing market and economic crisis?

If principal on some mortgages are lowered, market will move towards a home price equilibrium that is lower than the current home prices. The houses for which mortgage principal is not reduced will lose value as an unintended consequence.

Lowering principal impacts households and corporations in the following ways:

1.For many households, home is the only nest egg. Bu reducing principal, their home nest egg will lose value.
2. For corporations holding mortgage backed securities will have to write down the security values due to reduced principal and interest payments.

Therefore, lowering mortgage principal on some houses or all houses is not a solution to current crisis.

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