The only way I would encourage principle reductions is if:
1. The lender and the borrower are the only ones to be affected. NO bailout money should be received by anyone along the transaction chain…all the way to the derivatives written against that mortgage.
2. The transaction should be flagged as a sale for purposes of public records and appraisers should have to use those as comps when appraising properties in the future. These new comps are the real sales, since the “buyer” wasn’t really buying the house at the previously inflated price since he/she had no intention of paying it off with earned income (that would be from a JOB, not housing appreciation).
