Yesterday, I read an article on Digg throwing around the possibility that some people are simply going to let the bank foreclose because their property values have dropped so significantly.  I have a suggestion for averting it, but before you read my suggestion, please read the article yourself here: http://www.slate.com/id/2188982/pagenum/all/#page_start

In essence, my idea is for the lenders and borrowers to make a new loan based on the new appraised value of the home.  More specifically, it works like this:

Suppose the borrower has already paid off x% of the mortgage at this moment.  Thanks to the subprime crisis, the house is now worth significantly less than the original loan value.  When the “teaser rate period” expires, the bank writes off the old loan and makes a new loan with the principal starting at (100-x)% of the appraised value as determined no more than one month before the expiration of the teaser rate.  Ideally, it should be a fixed rate loan with a rate that maintains what the borrower is paying at the present time.

By doing so:

• The bank loses because it’s another write-off.  Write-offs = BAD.
• The bank wins because it gets to eat a substantital amount of the prepayment and charge a higher interest rate on the new principal.
• The borrower wins because they will not have to go through the inconvenience of moving and can continue paying the amount they have always been paying.

If I have time, I’ll try to contrive an example.