This is something I have wondered for quite a while.

I know in a normal market it doesn’t make sense to reduce the principal on a mortgage, but in the case where millions of people are forced into foreclosure in any given month, it just makes sense to do so.

I tell you one thing, if the mortgage company (Countrywide) would have worked with a relative of mine, she wouldn’t have been forced to walk away from the house. But they couldn’t even be bothered to open the registered letter she sent them explaining her circumstances.

Banks may have to swallow reductions in the principal of some troubled home loans to ward off greater losses that could result from outright default, Federal Reserve Chairman Ben Bernanke said on Tuesday.

Warning that mortgage delinquencies and foreclosures are likely to rise, with more declines in house prices, Bernanke called for active measures from both the public and private sectors to stabilize housing markets.

“This situation calls for a vigorous response,” Bernanke said in a speech to the Independent Community Bankers of America, referring to government and private-sector initiatives to slow the rate of home loan failures.

“Measures to reduce preventable foreclosures could help not only stressed borrowers but also their communities and, indeed, the broader economy,” he said.

Doesn’t it make more sense to lose a little bit on the value of the loan than to lose the entire amount outright and have almost no possibility of recovering it anytime in the foreseeable future?

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