[quote patb]
In a decent society, a bankruptcy judge would write the note down to the new value of 200K.
[/quote]
Why? It is a secured note. Someone fronted the 400K. If you want mortgage rates to go sky high, go ahead and do this. The people lending money will start demanding a higher interest rate to offset the risk of loss of capital. They will refuse to lend until they get this. Remember that the lenders only make about 72% over the life of the loan (not adjusting for inflation and assuming that they are the primary source of capital). If you are going to demand a 50% haircut from the lenders with the possibility of then getting 36% back for a total return of -14% over a 30 year period(about -0.5%/yr) vs their 72% for a 30 year (about 4%/yr). The result will be mortgage interest rates close to 8 or 9% because you are effectively taking a secured loan and making it unsecured… just like credit cards – whose balances can be written down.

I would LOVE to have all my ‘costs’ readjusted if the real price changes. Imagine that if a stock price goes down, I get some of my cash back because its real value is less!! NICE!!!

[quote patb]
yes it may not appeal to people but the
cramdown is the best outcome.
[/quote]
And what of moral hazard?