What about a compromise between what is owed and current market value?

We are always hearing talk about the government wanting to help people stay in their homes. We are also hearing that most attempts at loan modification fail and that banks do not want to write off any of the principal.  However, when lenders accept a short sale, or foreclose on the loan and then sell the property later, that is exactly what they have done (losss of principal) with the additional consequences of uprooting the current owners and causing turmoil in the neighborhood.  In some neighborhoods in the Phoenix metro area, particularly those built in 2004-2006, nearly all the homes are going to end up changing ownership through short sales and foreclosures because the current values are less than half what the original owners paid for these homes.

So, what if lenders took a compromise position with "underwater" owners who really would like to stay in their homes?  For example, the owners owe $200,000 on a home that is worth $100,000 in today's market.  If the property is sold either as a short sale or as an REO after the trustee's sale, the lender gets around $100,000 (probaly less, after fees and such, but let's keep it simple.)  What if the owner and the lender could agree to modify the mortgage to $150,000?  This would keep the homeowner happier about staying in a home they feel they overpaid for, make it far easier for the homeowner to make the payments, preserve his credit; and the lender would lose at least $50,000 LESS than they would have in a short sale or foreclosure sale, with a lot less hassle.  Further, we would have more stable neighborhoods, which is a goal we can all get behind.

Maybe this would not be great news for short sale specialists, but it could be a REALLY great way to stabilize prices and neighborhoods and get the real estate market on a much faster track to normal appreciation.