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 DSNews.com story) brings up an issue that, well, honestly makes no sense.
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.