There is, possibly, some merit in the proposal; but it won't work the way it's described in the article.

The monthly payment on a mortgage does not change as the principal is paid down, so simply reducing the principal doesn't make it any easier for the buyer to make the monthly payment. It's only the monthly payment that the people most harmed by the current situation can afford to look at. They can't - directly - make decisions based on how much total amount they still owe.

Those "innocently" in the most trouble are mostly, so far as I can tell, buyers of "existing homes" with lower values who've been scammed into predatory loans that have jumped the payments beyond what they can pay monthly. The principal amount doesn't matter to them.

The current crisis is largely due to an excess of "investment money" that encouraged lenders to "try to get it loaned out" and gave them incentives to lend to people who couldn't afford to borrow under any terms. To protect the lenders, adjustable rate loans were widely used, along with a few even more predatory kinds. Additionally, the credit and bankruptcy laws and regs were changed, again to protect the lenders, by giving the victims fewer options for obtaining relief. or by reducing the extent of the remaining reliefs that can be granted.

The excessive amounts of "investment cash" available (artificially inflated by speculative trading - churning - in "debt packages") provided funding for much more new home construction than could be profitably and safely sold, so the sales and financing gimmicks were pushed to encourage more people to buy new homes rather than trading up within the existing home market.

The imperative sell, and finance, new construction, has spectacularly depressed the real market value of homes in the "existing home" market to the point that very many people - through NO FAULT of their own, are in "upside down" mortgages where the remaining principal on the loan is larger - sometimes very much larger - than the current market value of the home. This is because the actual market values of the homes is less than it was at the time of purchase. Reducing the principal amount of the mortgage at least to the current market value of the property would help to give the victims the option of refinancing.

It's this "upside down" condition that makes it impossible for people to refinance into a new mortgage with lower and more appropriate monthly payments, or even to sell a home to get out of it and into one that they can now afford - which is what many people really need and is what would most help them.

Access to realistinc available refinancing would be somewhat helped by a reduction in principal values of many existing mortgages; but it would only help if refinancing under fair and equitable terms is actually available and if people understand that they can safely look for it. Since a re-fi even in the best of circumstances takes at least a few months, quite likely the "freeze on foreclosures" now available only to Fannie Mae and Freddie Mack borrowers would need to be extended to all mortgages to allow time to work through things.

It's an idea worth receiving some consideration, but it needs some additional parts to make it a plan that will actually work.

Re-fi's with an ABSOLUTE PROHIBITION on Adjustable Rate Mortgages, Front Loads, No-Pays, Balloons, and other "gimmicks" is of absolute necessity if any plan is to be helpful to the "innocents." (My personal opinion is that the "originating lender" should be held permanently responsible for the debt, until it's paid off. Loans could be packed for servicing, with appropriate service fees taken from the payments; but should not be permitted to be "sold.")

Exisiting "recovery" plans largely include, along with other "features," throwing even more money at the construction industry, already somewhat overbuilt, to produce more new homes to sell (at prices the real majority of people can't afford). This is just "picking at the scab" on the wound that caused the hurt; but sometimes draining the wound does help, even if it takes a bit of additional flesh off the victim.

John