Make banks cut mortgage principal, sure, but who pays?

If your house is now worth half of what you paid -- a situation all too real for some of our neighbors -- wouldn't it be nice to get a big break on your mortgage?

That's what at least two Southern Nevada Democrats are advocating as another solution to the housing crisis.

Last week, former Rep. Dina Titus told a meeting of Hispanics in Politics that to see real progress in solving the crisis, banks have to cut the amount of principal owed on underwater homes. Homeowners are struggling to make payments on the pre-bubble value of a home, said Titus, who's seeking election in the 1st Congressional District.

Later that day, Rep. Shelley Berkley, a candidate for the U.S. Senate, urged a move toward principal write-downs "with all deliberate speed." She has been calling for the resignation of Federal Housing Finance Agency acting director Edward DeMarco for months, because DeMarco steadfastly refused to consider principal write-downs for mortgages held by Fannie Mae and Freddie Mac.

There's a serious downside to principal reductions, of course. DeMarco notes that taxpayers would take hit to the tune of billions that the government would simply have to write off.

On the private-loan side of the ledger, the $26 billion nationwide settlement of alleged mortgage misdeeds announced last month has money set aside for principal reductions. But that settlement -- which comes from bank profits -- will reduce the value of mortgage-backed securities in everything from 401(k)s to mutual funds.

In other words, it's still true: There's no such thing as a free lunch. And while millions of Americans who saw big banks get bailed out under the Troubled Assets Relief Program are probably sanguine about banks losing profits in order for those Americans to see smaller monthly mortgage payments, the fact is, bankers aren't the only ones who would pay under such a program.

Whether it's a government-backed mortgage or one issued by a bank, if you cut the principal, either taxpayers or investors take a hit, said Bill Uffelman, president and chief executive officer of the Nevada Banking Association. Uffelman noted DeMarco's reluctance to embrace the idea on the government side of the ledger.

Not only that, but principal write-downs don't help people who purchased homes for cash or have paid off their mortgages, but have seen their equity disappear with the bursting of the housing bubble.

Where are the Republicans? U.S. Sen. Dean Heller -- whom Berkley is running against this year -- gave a generic but non-specific endorsement through a spokesman. "While full details of this initiative have not been released by the administration, Senator Heller believes all options should be discussed to help Nevada families stay in their homes," said spokesman Stewart Bybee. "Any new housing assistance initiative should be fully evaluated to determine its effectiveness and economic impact."

In other words, Heller doesn't want to come out against a program advocated by Berkley to prevent her from painting him as callous and unconcerned, but he reserves the right to object to the program in the future.

One Republican Nevada delegation source -- who offered thoughts on background -- said principal reductions might result in a tightening of credit rules, as banks seek to stem losses. That would further impede a person's ability to buy a house in the first place, even a foreclosed home at present market value.

Rep. Joe Heck couldn't be reached for comment, but last week he offered a bill aimed at helping people who have already lost homes to foreclosure. The measure would ease credit to buy a new home, provided the person was current on paying rent over the course of the past year. And Heller has embraced an idea that would allow people who can't afford mortgage payments to lease their homes from their mortgage holder for five years, allowing them a chance to re-purchase them in the future.

No matter the program, however, somebody always has to pay, whether that be the taxpayers, investors, or Nevada's beleaguered residents struggling to stay in their homes.

Steve Sebelius is a Review-Journal political columnist and author of the blog SlashPolitics.com. Follow him on Twitter (@SteveSebelius) or reach him at (702) 387-5276 or ssebelius@reviewjournal.com.