It is fraud. There is not really any method of explaining it away.
Currently valuations of homes is 100%, and I will repeat, 100% dependent on appraisals (and or BPO’s if the home is a foreclosure). If your home does not appraise you don’t get the loan. Sometimes even if your home appraises the lender may gaurdband the appraised value in a depreciating neighborhood.
So your statement about latent price discovery is totally useless. The fact of the matter is that when the house sells, that is the ONLY time the valuation of the home is used in a proper manner. Period.
Basically then what we have with principal reductions is a reduction of information such that the basis of valuations for resale inventory is FALSE. Not only does this defraud the buyer, it also defrauds the lender. It also perpetuates the ignorance of price strategies of sellers. Furthermore a skew is introduced between the true valuation of the home by the appraiser and those that have had principal reductions. In fact, let me ask, “What does the government or the lender use to recalculate the new principal value?” Do they call an appraiser? Do they look at comps?
So not only is this tantamount to fraud BUT by concealing the true valuations of ALL homes the de facto valuation is done on a limited supply. In a depreciating market this clearly is an INFLATIONARY tactic because lack of data will then cause older comps to be used. This then represents a false valuation and the house will be valued artificially higher then it should be.
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Loan modifications stink as well. In my opinion they are just as bad.
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Here is the bottom line. There is nothing good about loan mods, principal reductions or anything like that. It is a perpetuation of fraud. It binds to the current homeowner to own an asset they cannot afford. It covers up true valuations of neighborhoods.
Furthermore, by letting every property revert to the mean value and GET PURCHASED WITH NEW MONEY you will then get people buying homes, fixing homes up and spending more money. By binding an already strapped homeowner you do not get any reinvestment in the home, you get no economic benefit, and you will more then 50% of the time, see that same homeowner fall into default yet again.
If you think that the you will see an escalation of depreciation with policies like this all I can say is that you could not be more wrong if you tried to.
