[quote=SD Realtor]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.[/quote]
Um… You just made my point. The recipient of a principal reduction workout CAN sell the house at market price. And that subsequent sale is when the price discovery occurs (and that’s why the latency exists). Price discovery does not occur at the time the workout is granted. The net result is still deflationary. Principal reductions are basically foreclosures where the lucky lottery winner gets to effectively buy the house back at the foreclosure (market) price. As for appraisals, the point is moot. Lenders will make the offer and the borrowers will decide if it’s worth it to take the deal or just walk. If the principal writedown does not bring the loan down to an amount that the borrower feels will put them above water, they’ll just do the rational thing and walk. Then the house goes into foreclosure, someone buys it, and the comps are set lower. All deflationary.
Contrast this with an interest rate reduction workout. Here the borrower is stuck in an underwater house for a decade while they and the neighborhood get to pretend the house is still worth what it was at the market peak. There is no price disovery at all because the house is not going on the market anytime soon.
Also, I don’t see how you can call it fraud. If the bank gets the investor(s) to agree, they can do whatever loan mod they like with the borrower. Likewise, once Uncle Sam buys the paper, they can do whatever mods they please.
Look, again, I would much rather there be no mods at all. But since it appears that mass loan mods are coming… I would rather see principal reduction mods over interest rate reduction mods.
