Here I reveal my ignorance of law, accounting, and whatever else you want to accuse me of. But it still makes sense to me in a "best overall outcome" sort of way.
Banks have written down billions in "worthless" mortgages. Nevertheless, they are holding homeowners (the people on the other end of those mortgages) responsible for the full value of these mortgages. If the homeowner cannot pay per the terms of the contract, the bank forecloses. The homeowner is out on the street. The bank auctions off the property at a value that probably comes closer to what it is carrying on it's books as the "written down" level of the contract. The bank has basically taken the loss for making a poor judgment in writing the contract in the first place.
Wait a minute. Do we have to go through foreclosure, eviction and auction to make the books balance? Why does the homeowner end up on the street?
Why doesn't the bank, having written down the value of the mortgage, reduce the obligation of the homeowner as well? Then the bank gets a performing loan with (probably) a higher value than what the house brings at auction. The homeowner gets to stay in the house.
The sanctity of the mortgage contract is the only thing that is getting protected in the conventional scenario. Is the paper worth more than all the people involved?
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