Investment funds are buying billions of dollars’ worth of home loans, discounted from the loans’ original value. Then, in what might seem an act of charity, the funds are helping homeowners by reducing the size of the loans.

Thats an extremely responsible thing to do and very good development in my view.

Sometimes, people foreclose because they can't make their payments, but this current crisis evokes the specter of debt slaves who can make the mortgage payments but can never sell the house, because the sale price won't clear the mortgage and they can't save the difference. Its called "jingle mail." When you mail the mortgage lender your keys because 7 years with a foreclosure on your record is a better fate than having to come up with hundreds of thousands of dollars.

Given that home prices are not going back up, banks may be in a position where the losses they would take on principal by adjusting these mortgages are better than the losses they would take from going out of business if too many of these mortgages foreclose. However, so far it sounds like this is only happening in cases where the bank has already gone belly up, the mortgages have been bought up at pennies on the dollar, and investors looking to buy the mortgages are unwilling to do so if they think that future "jingle mail" is in the offing.

Arguably, if not for the massive taxpayer largess that has bailed out a lot of these banks and artificially propped up the housing market, more banks might be forced to make these kinds of principal adjustments. Consumers might be better off in that case, as the public debt would be lower and many of them would owe less on their mortgages.

I see this, in some respects, as a path to sanity, instead of the given situation where everything is going down and the question for homeowners is how badly are you going to get fucked before you get out - with the weakest going earliest but with no end in sight for those with the means to hold on... millions of people paying underwater mortgages for years, praying for inflation... The impact this has on the mobility of our society and people's ability to save for retirement may contribute as much to our economic malaise as the direct costs.

Back to Business - Investment Funds Profit Again, This Time By Paring Mortgages - NYTimes.com