In today's The Wall Street Journal, the Chairman of the Federal Reserve called for lenders to reduce the principal on mortgages reflecting negative equity, which is when the cost of the mortgage outstrips the value of the home, leading to default and abandonment. Negative equity is not caused just by profligate borrowers getting in over their heads; the fall of housing prices is affecting everyone. In a neighborhood where there are a lot of foreclosures the surrounding homes, even if occupied by a homeowner with good credit dutifully paying off his/her mortgage, the price of his/her home will still dive.
In a situation of negative equity (how these business euphemisms sparkle like the morning dew!) a homeowner's equity is worth less. He can't borrow against it to pay off his mortgage. He walks.
In this administration of high rollers and laissez faire oolala, this suggestion of Bernarke's is practically socialist and smacks of the New Deal. Paulson, our lovely Treasury Secretary, turned his nose up at the suggestion. He's been "nudging" lenders to reduce interest rates. Unfortunately, that ain't gonna do anything. Besides, since these initiatives, about 250,000 loans have been renegotiated, and probably these efforts will only put off foreclosure rather than prevent it. [spiraling down]