Fed Chairman, "Banks - write down principle"

Bernanke advises banks to get more active with their portfolio prior to foreclosures:

Money quote:

Bernanke advising banks to consider writing down principal: "Principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure. . ."

My perspective

Bernanke appears to trying to protect market prices by having banks provide an incentive for homeowners with no equity in their homes to stick it out rather than walking away. Downward pricing pressures have been aggravated by increased inventory of foreclosed homes on the market, pulling home prices on listings that aren't foreclosed down closer to the level banks are willing to sell their inventory.

What isn't addressed in this article is whether Bernanke supports homeowners who get such write-downs relief from having the write-down reported as income by the banks to the IRS, which would significantly increase a struggling homeowner's income tax liability. Typically banks report write-downs to the IRS on a 1099, homeowners could get hit with reports of "income" in the tens of thousands of dollars when in fact they received zero dollars, just an adjustment of debt owed.

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