Ah, for scenario #2, you would have to assume the bank has the *authority* to renegotiate the loan! They may not own it anymore, despite still servicing (ie collecting payment) on the loan, because they repackaged it up like a bit of meat in a sausage and sold it as part of a mortgage-backed security (MBS). And picking out one tiny piece of meat to examine it more closely *after* it’s been made into a sausage is pretty difficult, no?

If you were the sausage-buyer, you’d be pretty pissed off if it turned out that due to the rising cost of meat, they substituted in sawdust, right? You paid for all-beef sausage, you want it to perform like an all-beef sausage.

Same thing for the MBS buyer. People bought it at a certain price on the expectation of a certain quality of product, ie that all the mortgages in it would say, be paid off in 30 years at 5.5%. You’d be pissed off if after paying a premium now for a future cash stream, people could just change the terms after your money’s gone, right? Just like biting into the sausage after the Del Mar Fair is over and finding what you can only hope is a green herb.

To complete the analogy, you are proposing trying to go back to the original butcher and complaining about the quality of his meat, which he had long ago sold off to the sausage maker. You may have a point, but the sausage maker was culpable for buying rotten meat. You can’t pin the responsibility for fixing the situation clearly on one party anymore. You’d have to get the butcher, the sausage maker and whoever sold this “all beef patty” to you all in the same room to discuss how to make it all better. Similarly, the responsibility for fixing the loan is diffused across too many parties for it to try to re-negotiate, and it’s not clear at this point who would have the authority to fix a contract that’s been handled by so many people.