Mass mortgage forgiveness: Good intentions, bad idea

Floating piggy bank

Making banks change everyone’s mortgage so homeowners only owed what their homes were really worth would pump $71 billion into the economy, create more than 1 million jobs and save families $6,500 on mortgage payments -- every year.

Oh, and it would fix the housing crisis.

That's according to a report by The New Bottom Line, a nationwide campaign representing 1,000 faith-based community and labor organizations.

The group wants to put pressure on state attorneys general to ensure that principal reduction is part of any mortgage settlement reached with the big banks over the housing market collapse.

Sounds really good, doesn’t it?

Since Wall Street screwed up the housing market by offering bad home loans, in part to people whom the banks should have known couldn't afford those loans, we now make them forgive a portion of those loans.

"The banks created the housing crisis with their reckless and predatory lending practices," the report ( argues. "They should be held accountable for the damage they have done to our economy and be forced to do their part to clean up the mess they have created."

The trouble with this argument is that $71 billion wouldn’t just magically disappear. It would come out of somebody’s pocket.

In today’s real estate market, loans are packaged into mortgage-backed securities and sold to investors.

If the government said homeowners didn’t have to pay back all the mortgages they owe today, then investors would lose $71 billion.

Investors would think about that loss when deciding whether to invest in the mortgages that are made tomorrow. To cover the possibility of a future drop in home values, investors would jack up the price you have pay to refinance or get a mortgage to buy a house going forward.

While far too many homeowners owe more on their mortgages than their homes are worth and changing the rules after the loans would help them, it would hurt everyone who has to get a mortgage from that point forward.

Enter’s Super Summer Friends Contest today! You could win a $100 gift card to just by going to our Facebook page, signing up to be our friend and filling out an entry form. Contest ends Sept. 7, 2011.

You can also follow on Twitter.