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Banking industry witnesses told the House Financial Services Committee yesterday that broad-based reductions in the principal of home mortgages could cost up to $900 billion and that targeted solutions that reduce mortgage loan principal are more appropriate.

Yesterday's hearing was set to examine second liens and other barriers to mortgage principal reduction in foreclosure mitigation. The Obama administration recently announced changes to Home Affordable Mortgage Program and Federal Housing Administration programs that would allow some principal reductions to help stem the tide of foreclosures.

Committee Ranking Member Spencer Bachus, R-Ala., noted concern over the social cost of broad principal reductions. He asked the panelists if such a program could affect future pricing of mortgages. Barbara Desoer, president of Bank of America Home Loans, said that a wholesale reduction in principal could result in higher-priced mortgage loans in the future. In her testimony, she added that principal reductions must be done in a "measured, responsible way so that only customers with a legitimate hardship and genuine interest in maintaining homeownership qualify." All the witnesses told the committee members that they are willing to reduce the principal on second mortgages if the lender of the first mortgage offers a similar reduction.

When speaking about the HAMP program, Sanjiv Das, president and CEO of CitiMortgage, Inc., noted that although the program has moved only about 170,000 homeowners into permanent mortgage modifications, that it has received unfair, negative publicity. David Lowman, CEO of JPMorgan Chase Home Lending, noted that the program was implemented "at lightening speed" and that a great deal of learning has taken place. He anticipates that the recently announced requirements pertaining to documentation for mortgage loans will help enhance the program's effectiveness.