A 20 to 30 percent drop in home values is hard for banks and home owners to adjust to. Here is a possible plan equal to the task. Banks could be given the option of reducing the princpal owed to current assessed values. The difference in the value of the mortgage on the bank's books could be adjusted without a charge against the banks' capital as is now not the rule. These values exist only on paper and paper can be adjusted when it is out of line with reality. Example:
Original mortgage amount $100,000
Current market price 80,000 and the amount of the new mortgage
Difference 20,000 written off with no charge to banks' capital.
The interest rate on the new mortgage of 80,000 would be at current rates. The banks would have nothing to lose by getting these non-performing loans off the books. And, the home owners would have a mortgage they could afford, saving them from default. This is the bold plan that Obama is unlikely to propose.