Here's a snapshot of reality on the ground in too many communities:

Home values have tanked. Homeowners are struggling to keep up with escalating loan payments, and many are falling behind. Beleagured lenders do what they've always done: start the foreclosure process.

But we're not living in a market where doing what one has always done will work.

The proof is threefold:

• banks have a growing glut of REOs (Fannie Mae and Freddie Mac have a combined $6.9 billion REO portfolio as of March 31) in a declining market;
  
• "opportunistic investors" (read: vultures) are buying distressed notes directly from lenders at severe discounts (20 to 50 cents on the dollar), only to foreclose on homeowners themselves or "restructure" the homeowner's debt at a 100% plus profit; and
• lenders are facing increased court challenges regarding foreclosures: a lender must be able to prove it owns the note it is attempting to foreclose on, and many note owners are being barred from foreclosing because, as a result of sloppy paperwork, they can't prove ownership of the note.

So here's a thought: what if lenders took the vultures out of the equation, and instead worked with homeowners to keep their homes off the auction block? In most markets, many borrowers would be able to keep their homes with lender cooperation, and the lender would make more money than it would by selling the note to a vulture, since most writedowns wouldn't require the drastic discounts demanded by the vultures, and the lender would continue to receive interest income. The lender would also avoid the prospect of yet another REO on its books, and the associated expenses: insurance, maintenance, property taxes, costs of sale, and the opportunity cost of the money it cannot invest because of reserve requirements for another failed loan.

And what of the investors who actually own the notes, what if they won't work with homeowners? Well, the homeowner can always call a lawyer to tie up the foreclosure in court and make the investor prove they have standing to foreclose. Oh yeah, I should mention that these cases usually take years to go through the judicial process, and cost tens or hundreds of thousands of dollars for the lenders. Even if they win, they lose, as their options upon winning in court are to foreclose at a loss, or sell to a distressed debt investor at a loss.

Working with a homeowner avoids these losing outcomes, and keeps another empty home off the already overloaded housing market. This seems like a no-brainer. But then, I didn't go to business school, so maybe I don't know something that the geniuses who helped create this mess, and the oil speculation mess, and the Enron mess, and the S&L mess, and the junk bond mess, and the - I could go on, but you get the picture.

Let's hope the lenders have some simpletons among them who think like I do.