How Mortgage Modification Could Affect Your Portfolio

The Fight Between Two Opposing Camps

One of the fights that you’re likely to see in Congress soon is the debate over mortgage modifications. Under the current law, judges do not even have the right to modify the terms of a residential mortgage, meaning that there is little or no relief available through the court system. Some legislatures want that to change to hasten the end of the current economic climate. Banks, on the other hand, maintain that they would be forced to increase down payment requirements and interest rates for good customers in order to compensate for the reality that they could no longer price their mortgages as if they were beyond modification. The bank lobby is fighting the proposed changes ferociously.

Here’s the problem: Both sides have a point. On one hand, forcing immediate write-downs by banks would be painful but quite possibly end this entire mess in a fraction of the time. On the other, this would likely lead to the immediate nationalization of the banks and the wipeout of what little remains for bank investors. That could drive stock prices even lower, hurting your 401(k), pension plans, brokerage accounts, and anything else tied to Wall Street.

If you are in a situation where you can’t make your mortgage payment, you’re unquestionably going to want mortgage modification laws put into place. If, on the other hand, you are current on your payments and have built up your savings and investments, it is likely that you aren’t pleased at the notion of your bank stocks being effectively wiped out or having your dividend income drastically cut. Unfortunately, unless someone can come up with a solution to solving the needs of both constituencies, it is highly likely that a lot of people are going to be disappointed and affected financially.