OK, lets say you bought a house for 200,000. You paid 80% LTV so your mortgage is $160,000.

Nearly 15 million homeowners owe more than their homes are worth; in this group, about half the mortgages exceed the home value by more than 30 percent.

If your mortgage now exceeds your home value by more that 30 percent, your home is worth, at most, $123,000. Its probably worth a lot less then that because you've probably been paying mortgage payments for several years and you're still 30 percent down, but lets stick with the best case scenario.

The hole is $77,000. If you can do a non-recourse foreclosure, you are out $40,000 and the bank is out $37,000.

$40,000 is the most you could ever be out on this home.

Now lets enact the Feldstein plan:

If the bank or other mortgage holder agrees, the value of the mortgage would be reduced to 110 percent of the home value, with the government absorbing half of the cost of the reduction and the bank absorbing the other half.

We're going to bring the mortgage down to $135,000. This costs $25,000.

The bank is out $12,500.
The government is out $12,500.

Now, you sell the house.

You are out $52,000.

$40,000 is the down payment you've already lost, and the other $12,000 is the difference between the mortgage value and the price of the house. (There is a lot of other principal that you also loose that I'm not accounting for here.)

Thats the best case scenario. If the value of the home drops further, you'll owe more. There is no limit to the amount you could owe.

So, lets recap:

Taxpayer looses $12,500 - a total of $350 billion.
Homeowner looses at least $12,000 - possibly more.
The Bank wins - they save $24,500 and their total losses are capped at $12,500!

In other words, as I said this morning, its a massive transfer of wealth from taxpayers and homeowners to the banks. It is extremely negative for homeowners. Feldstein argues that the whole program ought to be voluntary. I can't see any reason why a homeowner would agree to this.

Was this floated as a joke?

Decius wrote:
OK, lets say you bought a house for 200,000. You paid 80% LTV so your mortgage is $160,000.

Nearly 15 million homeowners owe more than their homes are worth; in this group, about half the mortgages exceed the home value by more than 30 percent.

If your mortgage now exceeds your home value by more that 30 percent, your home is worth, at most, $123,000. Its probably worth a lot less then that because you've probably been paying mortgage payments for several years and you're still 30 percent down, but lets stick with the best case scenario.

The hole is $77,000. If you can do a non-recourse foreclosure, you are out $40,000 and the bank is out $37,000.

$40,000 is the most you could ever be out on this home.

Now lets enact the Feldstein plan:

If the bank or other mortgage holder agrees, the value of the mortgage would be reduced to 110 percent of the home value, with the government absorbing half of the cost of the reduction and the bank absorbing the other half.

We're going to bring the mortgage down to $135,000. This costs $25,000.

The bank is out $12,500.
The government is out $12,500.

Now, you sell the house.

You are out $52,000.

$40,000 is the down payment you've already lost, and the other $12,000 is the difference between the mortgage value and the price of the house. (There is a lot of other principal that you also loose that I'm not accounting for here.)

Thats the best case scenario. If the value of the home drops further, you'll owe more. There is no limit to the amount you could owe.

So, lets recap:

Taxpayer looses $12,500 - a total of $350 billion.
Homeowner looses at least $12,000 - possibly more.
The Bank wins - they save $24,500 and their total losses are capped at $12,500!

In other words, as I said this morning, its a massive transfer of wealth from taxpayers and homeowners to the banks. It is extremely negative for homeowners. Feldstein argues that the whole program ought to be voluntary. I can't see any reason why a homeowner would agree to this.

Was this floated as a joke?

I agree with you and Feldstein did not detail his analysis to arrive at that conclusion. He floated it as a "shared loss" between govt, banks and taxpayers. What he failed to capture, as you pointed out, the taxpayer takes the biggest hit.

Decius wrote:

To halt the fall in house prices, the government should reduce mortgage principal when it exceeds 110 percent of the home value. About 11 million of the nearly 15 million homes that are “underwater” are in this category. If everyone eligible participated, the one-time cost would be under $350 billion.

$350 billion is a lot of money. Although programs like TARP were larger, much of the money was repaid. This won't be repaid. Thats only the first problem with this plan.

If the bank or other mortgage holder agrees, the value of the mortgage would be reduced to 110 percent of the home value, with the government absorbing half of the cost of the reduction and the bank absorbing the other half.

And in exchange for this reduction in principal, the borrower would have to accept that the new mortgage had full recourse — in other words, the government could go after the borrower’s other assets if he defaulted on the home.

This plan is fair because both borrowers and creditors would make sacrifices.

This isn't really fair.

Typically, ones mortgage starts at 80 percent of the value of one's home.

By the time your mortgage is, lets say, 130 percent of the value of the home, you're in the hole by 50 percent.

Right now if you walk away and its a non recourse loan, you are out 20%, and the bank is out 30%.

The most you can ever be out right now is 20%.

Under this plan, they are offering to reduce the size of the hole, from 50 percent, to 30 percent.

The bank picks up 10% and the government picks up 10%. In exchange for this "deal," you agree that the loan becomes a recourse loan.

You are still in the hole by 30%.

If you walk, you are out all 30%. The bank is out 10%. And the government is out 10%.

In other words, the bank benefits from tax payer's largess and things get worse for the homeowner.

Furthermore, if this doesn't work, and the home value continues to drop, there is no limit to how much you can loose.

I'll bet a bunch of fat cats in Manhattan are laughing their assess off about this plan.

(There is some error in this analysis because these percentages aren't all relative to the same amounts, but I think its minor and I will update with accurate figures later.)

Well stated.