Why Not Foreclose?

I have been listening for a couple of years now to discussions of homeowners who are “underwater” on their home mortgages and struggling to make their house payments, and how lenders should accommodate them with lower payments and should lower the principal of the loan since the value of the home has decreased.

Mike Shedlock has a post yesterday addressing the question and offers the following as a reason why lenders should not reduce the principal, actually the only reason he offers. He may be saying this is worth thinking about in addition to the obvious reasons, but he doesn’t make that very clear.

Here's the real deal: If lenders gave loan modifications to everyone who was seriously underwater, it would openly invite everyone who was underwater to stop paying their mortgages.

It’s a good point, but my question is, why is anyone suggesting that the lender reduce the principal in the first place? That lender paid out that money in the form of hard cash to the person who sold the house, on behalf of the person who bought it. The present homeowner took that money to pay the seller, so why should he not be required to pay it back? If the present homeowner thinks he was “ripped off” on the value of the home then he should go after the seller for recovery, not the lender.

When someone buys a car, it depreciates. The moment you drive it off the car lot it is worth less than you paid for it. Are you then going to go to the bank and demand a loan reduction because the car is worth less than you owe on it? Of course not. If you bought stocks which declined in value, would you demand your money back? Of course not.

The problem is that we are letting emotion get in the way of sensibility. A homeowner and a lender are two sides of a business equation; nothing more, nothing less. It is utterly absurd to suggest that in the middle of the term of that business deal one side of the equation should surrender a portion of its equity in the deal because the other side cannot meet the requirements of the deal.