Delinquent Homeowners Get Aid from Government

The trouble is they're lazy.

Alan, you disagree with Steve?

The trouble is they drink.

Gee, Officer Krupke
Krup you!

The problem with principal reductions for underwater mortgages is they only make sense for those that truly will default. Applied to every under-water mortgage the lender just plain loses money. While it's true that being underwater makes one more likely to default it does not mean that all underwater mortgages fail. In other words being overweight may make you more prone to heart disease,but its certainly not true that all overweight people get heart disease.

It's true principal reduction on a loan sure to default does save everyone time and money , but there's no way because there's no way to be sure which loans will default. Then there is the moral hazard argument... We'd be better off waiting for the failure and agreeing to deed in lieu of foreclosure or letting the home owner stay as a renter for 1-3 years in exchange for not trashing the place. In this way, the defaulted borrower has time to transition and the lender doesn't have to sell into a weak market.

Too many of these borrowers are not in trouble because of a bad purchase mortgage, but because they continually refinanced and took equity out. The odds are if you reduce their debt with forgiveness they'll repeat the process and get into trouble all over again.

Principal reductions make sense only for those distressed homeowners who are in distress because of unemployment, not because their home has lost value.

No, that what makes sense for a distressed homeowner is forbearance, which makes a great deal of sense for someone who has lost their job and has a reasonable chance of getting new employment over the next several months..

Well, since none of the banks are interested in forbearance, principal reduction seems to be the way to go.

Riversider/ bjmatt, why do you hate me so much? Why do you choose to reward idiots that bought into the bubble and can't hang on, versus letting them take a 20% equity hit, let the idiot banks take their 20% equity hit and let the foolish GSEs take their 20% hit and let me buy at a sane rent to buy ratio?

On that's right, you both own coops in Nyc, and bought it for a blow job in 1989. Me, I ain't no weiner sucker. And no, riversider I ain't sucking your man boobs either.

Actually , Forbearance is very much alive. The banks are fighting tooth and nail against forgiveness.
I actually agree that if you knew with 100% certainty the loan would default otherwise and survive with a reduction then this works for both sides, but nobody is ever 100% certain.