As crazy and bizarre as it sounds, this MIGHT be the best strategy for all concerned. As Mr. Brightside noted, it probably results in the smallest and “easiest” loss for the bank.

The issues are as follows: (1) By doing this “short sale-re sale” strategy CW is still lowering the comps for its REO properties (and other properties, generically), (2) CW still has to take enormous hits to its capital to absorb these losses (and the hits may turn out to be too great), and (3) Are other lenders going to follow suit with a similar strategy.

If I were running CW, this is probably the strategy I’d try to use, which is simply a variant of, “What can we do to keep you in this house so that you can (probably) actually make payments that aren’t completely ridiculous relative to your real income?” It probably means lowering the mortgage by 10%-30% and/or lowering the interest rate somewhat. All of this absolutely sucks for CW, but it’s probably better than the alternatives. Which just goes to show you how screwed up things really are.

I wonder how Bank of America feels about this strategy?