Loan modification is a slippery slope

Loan modification is a slippery slope that has potential to exacerbate the current economic crisis.

Example: Homeowner A and B are paying their mortgage. However, homeowner B calls his mortgage company requesting a loan modification. The mortgage company explains that he is not in default and therefore they will not complete a loan modification. Homeowner B quits paying his mortgage and calls the mortgage company back and gets a $100,000 principle reduction. Homeowner A expresses to homeowner B that he is upset that his home is worth $100,000 less than he paid for it, however B then explains that he received a $100,000 principle write down by not paying his mortgage and negotiating a loan modification. This encourages homeowner A to stop paying his mortgage and the problem grows.

Example two, perspective homeowner A and B both earn $100,000/year, have 20% to put down, have dreamed of owning a home and are actively looking in 2005. Perspective homeowner A and B both like the same neighborhood and look at two neighboring and identical homes, one home is for sale for $550,000 and the other is for lease for $2000. Perspective homeowner A, realizing that he would have to take an exotic mortgage and that his payment would be over twice as much as it would be if he leases chooses to submit an offer for $500,000 so that he can take a 30 year fixed fully amortized loan while perspective homeowner B knows that there are others interested in the home and offers $600,000 and takes an exotic loan knowing that’s the only way he can afford it. Perspective homeowner B gets the property and tax write off and other benefits that come with home ownership. As a result of the inflated prices perspective homeowner B, frustrated that even though interest rates are historically he can’t take advantage of them and is forced to rent, as prices have become too inflated, and rents the home next door for $2000.
Homeowner B, pays twice the taxes as A as he waits for prices to come down. In 2008 prices are coming down but still not affordable and the legislation that helps A to stay in his home through principle write down is passed and essentially makes homeowner B pay for it. Homeowner B is left wondering who’s looking out for him, it seems no one.