@davidt1 What Would it be in the banks’ best interest to do, 1 or 2?
Depends on many things. The problem is that houses will not maintain their value, and that the person can not make close to the real interest payment. This goes into the more complicated area of discounting a notes value due to a change in underlying interest rates. If the house is currently worth more than the discounted rate of payments, it is better for the bank to foreclose. If the bank sees the house value dropping further (very likely) and the odds of the mortgage not remaining good at the reduce interest rate are poor, foreclosure is a better option to the bank.
Remember, many of these loans were NINJAs..
NINJA = No Income, No Job or Assets.
