I think the only way to stop the walk-aways is to modify the loans into very good fixed rates and write down the principal balances. I understand the moral hazard argument but at this point in time my response is “so what?” Even if a homeowner has the ability to pay the existing mortgage, it’s going to come down to WILL he pay, not CAN he pay. If he ruthlessly defaults, the end result is the same. Who cares at this point?
I cannot imagine that it will be more cost-effective to go through the foreclosure process just to end up selling the house as a discounted REO for the same price that you could have written down the balance to and kept the homeowner in the home. It’s a bad business decision to forego the mod. I understand the complications due to the securitization of these loans, but the govt’s purchase of this paper may resolve the issues. They do give a nod to this in Sections 109 & 110 of the new bill. We’ll see I guess.
