The oddest argument against principal reductions evah

There are arguments to be made against principal reduction — cutting what a mortgage holder owes to help him avoid foreclosure. But Fitch Ratings (at least according to a story) brings up an issue that, well, honestly makes no sense.

Seriously? Fitch urges caution because “a wide-ranging principal reduction program could potentially increase defaults among borrowers who would otherwise remain current.”

So, how could reducing the amount they owe increase the changes of default? Are you ready?

Because, says Fitch, if you reduce the amount of someone’s mortgage, he might end up “using mortgage debt (and, therefore, mortgage investors) to subsidize other consumer debt and expenditures.”

In other words, by Fitch’s logic, he might take advantage of his better financial situation to buy other stuff. “The mortgage payment is less, so I’m gonna buy a big TV!”

Ergo, keep their mortgage payments high to prevent them from spending money on other things. “We won’t reduce your mortgage. Really, it’s for your own good.”

Hopefully those “other things” don’t include, say, food.

About Andrew Kantor

Andrew is VAR's editor and information manager, and -- lessee now -- a former reporter for the Roanoke Times, former technology columnist for USA Today, and a former magazine editor for a bunch of places. He hails from New York with stops in Connecticut, New Jersey, Cincinnati, Columbus, and Roanoke.
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