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Here is the idea as expressed by me in round terms.
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1. If you are underwater on your home, but up to date on payments - you can turn it over to the bank with no hit to your credit.
2. You can stay in the home for at least a year for a fair rent decided by a 3rd party based on local rents. That rent goes to the Bank.
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Sure they banks lose some of the investments, but that is happening anyway, but in slow motion. And this slow motion foreclosure is not long term drag on the economy, but is effecting everyone else's equity AND is slwoing down the economy.
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The only "gift" the homeowner gets is.. no hit to his credit. It doesn't reward people with lower loan balances or anything. In fact, it only "rewards" home owners that are current on their mortgage.
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And sure, the banks take a hit, but so does the owner. His paid equity is gone. Both the owner and the bank bet on the equity and the price of the house going up. If the house didn't appreciate, they both lose. But this way, they both come out acceptable. The owner gets to stay in his house for a while, the bank gets a reasonable rate or return AND the bank has an asset that isn't an abandoned house. The entire neighborhood gets the benefit of occupied homes.