[quote=pri_dk]
There’s another way to look at this:
Assume the homeowner put zero down. (Not uncommon, and explains why they are so underwater.)
The homeowner has a neighbor (in an identical house) that put $100K down when they purchased, so they are at zero equity also.
Ten years from now, RE eventually recovers and the homes appreciate by $50K. Both homeowners sell.
The person who put money down loses 50% of his initial investment — the one who got a principal reduction goes on a $50K spending spree with the “nothing” that they received.[/quote]
No argument, but there still is no immediate give away to the homeowner. He simply reverts to exactly the same place he was when he originally bought the house with no money down. And the lender has less a valuable, but performing loan.
I know many wouldn’t be happy with this kind of false reward to buyers who made bad decisions, but it’s what lenders should have been doing for the last year in cases with qualifieed borrowers, modifying loans to current market value of the collateral, rather than foreclosing and flooding the market with properties, driving values down further.
