Government Mortgage Principal Reductions Dead-on-Arrival? - Daniel Indiviglio - Business - The Atlantic: "First, there's the sheer magnitude of negative equity in the market - probably somewhere between $300 billon and $1 trillion. CoreLogic estimated earlier this week that the tally was at $751 billion in the fourth quarter.
The second challenge the official spoke of was the difficulty in tackling a problem of this magnitude with limited monetary resources and still making it fair. Approximately one-quarter of Americans with a mortgage are underwater. You can't provide a principal reduction to all of them, so who do you choose? And how big a principal cut do they get?
Finally, there's the moral hazard issue. Once people hear that the government is cutting the balance of people's mortgages, everybody wants a dime from Uncle Sam. That could further exacerbate housing market problems, as strategic defaults may rise and prices may decline more steeply.
But in theory, shouldn't the Treasury have worked out all of these problems before creating their program? It certainly had some attractive features, like graduated principal reduction and decent incentives to lenders."