Geithner Plays Politics on Loan Modifications

It’s called throwing ’em a bone.

That’s what Timothy Geithner, the new secretary of the Department of the Treasury, did yesterday with his new bailout plan.

There are many elements of the bailout plan that requires discussion, but at least one that needs revision is the loan-modification elements. In short, Geithner is only the talking the talk on loan mod.

The bailout plan states that the new loan-modification plan will “drive down overall mortgage rates.” And that’s all it says.

This platitude misses the central question mark, which is how much modification will Treasury demand? Nearly every bank engages in some form of loan modification today, and rightly they should for reasons of prudent loss mitigation. Not every bank will modify loan principle, however – and that’s the political place Geithner refuses to visit, however necessary it is.

US Bancorp, for example, is aggressively modifying loans for its borrowers. US Bancorp will avoid rate escalations and seek to keep loan-to-value ratios below 100%, because once that threshold is breached, borrowers have a greater propensity to “walk.” One thing US Bancorp won’t do, however, is principle reduction.

My sense is that if Geithner seeks to force principle reduction on banks, he’ll face a tough, back-room battle. Certainly, US Bancorp appears as though it would resist such a mandate. So, instead, Geithner presents “loan modification” as a tough government-imposed requirement on those “greedy” banks. It all smacks of politics, something no one needs as credit remains scarce.