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.)

How to Stop the Drop in Home Values - NYTimes.com