Interesting mortgage reduction proposal

http://www.washingtonpost.com/wp-dyn/content/article/2010/02/25/AR2010022505817.html?hpid=moreheadlines

The Federal Deposit Insurance Corp. is developing a program to test whether cutting the mortgage balances of distressed borrowers who owe significantly more than their homes are worth is an effective method for saving homeowners from foreclosure.

Under the FDIC program, borrowers would be eligible for a reduction in their mortgage balances if they kept up their payments on the mortgage over a long period. The performance of those borrowers would be compared with borrowers given more traditional mortgage relief packages, such as those that cut the interest rate on loans.

I would add however, that the forgiveness should never bring the mortgage in line with market value, but somewhere above it(i.e. 20% above).

How far underwater are these homes that the cut, plus the original downpayment still leaves the mortgage 1.2x the value?

There should be some sort of clause that if the borrower stays in the home long enough and sells the home for more than the reduced loan amount, the bank gets the gain or their money back.

Some homes have a current ltv of 180%. The true note holder has no real hope of getting paid back, and if we're talking about the borrower truly unable to now pay the loan redoing the loan to 120% LTV(assuming the borrower could manage the debt service coverage ratio). I could see the argument in favor of principal reduction over time, but if we're talking bringing mortgage in line with market value, then we're rewarding the borrower too much in my opinion.