Will Government Force Banks To Reduce Loan Balances For Underwater Homeowners?

The WSJ reports today that, “The Obama administration is trying to push through a settlement over mortgage-servicing breakdowns that could force America’s largest banks to pay for reductions in loan principal worth billions of dollars.”

This is a good update on a sticky topic: should banks be forced to reduce mortgage balances for distressed homeowners who owe more than their homes are worth? Banks argue it creates a moral hazard where borrowers can just get off clean for an obligation they signed up for. Regulators, consumers, and many economists argue it’s the best way for banks to get control over rising foreclosures—which eventually lead to losses that are potentially larger than if they just reduced loans to keep people in the homes.