The Value Of Debt Relief

Posted By on October 25, 2009

Debts have value only to the extent that they are being paid, and a rapidly rising number of U.S. households aren’t doing so. Those defaults are leading to losses at banks, a wave of foreclosures, trouble for neighborhoods and strife for families. But they are also providing an immediate, albeit radical, form of debt relief.

“It’s not ideal, because it carries other costs,” said Karen Dynan, a consumer-finance specialist at the liberal Brookings Institution think tank who recently served as a senior adviser to the Federal Reserve. But it is “going to help get household balance sheets back to the right place.”

[Debt Relief chart]

If one accounts for defaults, U.S. households’ debt burden is shrinking a lot faster than the official data suggest. First American CoreLogic, which tracks the performance of mortgage loans, estimates that some 9.3% of the nation’s 52.4 million mortgage holders were 60 or more days behind on their payments as of July. That represents relief on about $1.2 trillion in loans. The official data miss most of that, because the Fed doesn’t erase debts until banks have foreclosed, sold the homes and taken the loans off their books, a process that can drag out for more than a year.

www.wsj.com

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