Brother Ben Bernanke preaches banking heresy

Richard Mize

Published: March 8, 2008

What is the sound of one jaw boning? Should a sore arm be twisted? Can one whistle in the dark in the broad daylight?

Federal Reserve Chairman Ben Bernanke jawboned Tuesday — he talked, in other words, trying persuasion. He twisted lenders' arms.

He was preaching. Did anyone have ears to hear?

Bernanke told bankers meeting in Florida, where the burst housing bubble has left a real mess, not just a theoretical one, that they should work with troubled mortgage borrowers not only by renegotiating interest rates but by simply reducing the principal on outstanding loans for those who are upside down.

For people with subprime adjustable-rate mortgages that are resetting — those whose misplaced faith assumed the good times would roll and appreciation would rock on at least long enough for them to refinance — there's no other way out, he said.

He was preaching loan "forgiveness.” But it's not as generous as it sounds.

It would help stressed borrowers, of course. But, he suggested, it could save neighborhoods and communities — and could keep rising foreclosures from wrecking the fragile national economy.

And the people said ... nothing. There's been no rush to offer absolution to borrowers.

Maybe guilty lenders themselves haven't grasped that they have their own penitence to pay — and they can pay now, by writing down principal in the worst cases, or pay later, through the costlier hell of foreclosure.

Just because lenders suddenly quit underwriting bad loans doesn't mean they acknowledged their own sin: "Do not confuse Repentance with Disgust,” the Guide told John in C.S. Lewis's "The Pilgrim's Regress.”

The Guide continued: "And yet disgust has saved many a man from worse evils.”

Disgust, not repentance, is what turned lenders' lives around.

Was Bernanke whistling in the dark? Maybe "Bringing in the Subprime Sheaves.”

Probably. Lenders aren't likely to do any extra for borrowers until the federal government does some more — where it legitimately can, which rules out Congress giving bankruptcy judges power to rewrite loan contracts. Some things, after all, are sacred — or should be.

Bernanke preached on security. He bragged on the FHASecure plan, which the Federal Housing Administration came up with last summer. Under the new doctrine, qualified buyers behind on a loan because of a rate reset can refinance into an FHA-insured mortgage. "Qualified” is the sticking point.

"As a lender that originates FHA loans, I can tell you with confidence that finding a loan that will fit into the extremely narrow guidelines of this program is practically impossible,” said nonbeliever Scott Senner, a mortgage consultant with First Commercial Bank in Oklahoma City. "Very, very few borrowers will be able to save their home with this program.”

Only the elect, that is.

Bernanke praised the new FHA loan limits, which rose from $200,150 to $271,050 here. Amen, Senner said.

Senner praised the $100 down-payment financing — $100 down-payment financing — that the Department of Housing and Urban Development is offering on repossessed FHA-backed homes. Borrowers are eligible for up to $1,500 toward closing costs.

Not even this salvation is assured. Only would-be owner-occupants can come forward, and then only for "insurable” homes, which a HUD appraiser has determined needs less than $5,000 in repairs.

It's good news for first-time buyers now left with few options. But is there an apocalyptic spin to it? Senner said HUD "must see a lot more foreclosed homes in the pipeline” and is managing inventory.

Is the end here that near? We do see through a glass darkly.

The government's good works haven't sparked revival. And lenders probably will ignore Bernanke's unusual altar call — that they come forward and take pain now to avoid hell later. They'll testify: Forgiving loans is banking heresy, anyway.

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