[RightFighter]

I hope that happens. Bad behavior only stops when people are truly held responsible for their actions.

I agree with this. However, in this mortgage mess, the bad behavior was on both sides - the borrowers were borrowing more than they could afford to borrow based on their incomes, and the lenders were allowing these borrowers to qualify for 1-year or 3-year ARM loans knowing that they would very quickly jack those rates up as soon as they had the opportunity. The lenders bear some responsibility for it as well.

Suppose a lender gave a borrower $250,000 for a home that was probably only really worth $175,000 in a "normal" housing market. In addition, that lender allowed the borrower to just squeak by on their debt to income ratios to qualify for the $250,000 loan by offering the borrower a 3.5% rate on an ARM loan, while financing 100% of the home's "value". Now the borrower is struggling to make the payments, which have gone from around $1100 a month (plus PMI) to over $1500 a month or more.

Now, many of you say "screw the borrower", but the reality is that the lender is screwed too, because the home has now returned to a pre-runup value of closer to the $175,000 figure that it should have been worth in the first place. So, the lender can foreclose on the house, but then the lender is left with a home that will not cover the money the lender handed out to the borrower.

A bailout of the borrowers is not the answer, nor is a bailout of the lenders. I'm not sure where the answer lies, but it probably has something to do with "encouraging" lenders who have a certain percentage of these loans to readjust the loan amounts and interest rates to more favorable terms that can work for both parties. How you do that, I don't know, but there's got to be a better way than just having a million foreclosures on properties that are worth less than the lender has at stake anyway.

Does that make any sense? Any other suggestions, other than the standard "Screw 'em - throw them out on the street" response so popular around here?

[Amalie]

I'm not sure where the answer lies, but it probably has something to do with "encouraging" lenders who have a certain percentage of these loans to readjust the loan amounts and interest rates to more favorable terms that can work for both parties.

I am not sure that the lenders who are now holding semi-worthless loans would be willing to take an added paper loss, and I also don't know what the legal restrictions on a restructuring like this would be. It would require some hard swallowing for the lenders to take that sort of depreciation out of hand (say a 30% loss), especially since large funds now 'own' those loans, not local banks. And what happens to the borrowers' credit standing...

However, I think your solution is a great common sense idea that would work to take some of the pressure off of the situation.

[Freedom4US]

a lot of people are saying “screw the lender” actually, from anecdotal observation anyway. Loaning more than say 80 per cent of market value doesn’t make any sense. That way if the borrower defaults the lender doesn’t take a loss, or much anyway. And there are accounting devices and tax issues that come into play.

[Dutch Boy]

Suppose a lender gave a borrower $250,000 for a home that was probably only really worth $175,000 in a "normal" housing market....

Isn't that what those late night get rich quick schemes pull? Barrow more than the house is worth then keep the extra cash? If the buyer is unaware I would think that kind of thing would be a crime. Some lawyer would have a cottage industry suing the pants off the sellers.