I’m not going defend the morality of it, but think of it from the bank’s point of view. Maybe the property had dropped in value even more than $200K. You said it’s a “high end house” in OC, which probably means over $1 million. Maybe it was worth $1.5 million when the loan was made, and it’s only worth $1 million now. So it might have been worth it for the bank to save what they could out of the debacle, eating a $200K loss rather than a $500K loss (or more, with all the costs of foreclosure). Like I said, I’m not arguing the morality of it, just the business sense.
A guy I know used that argument to get a $130K principal reduction on a 2nd mortgage. And he had never even missed a payment. His credit got banged up a bit, but he sleeps better at night.
