> If it's under inflation, this equity deal is a bad one for the bank.
The bank is already in a tough spot. They're $100K+ in the hole in a foreclosure situation, so going a lesser amount in the hole is an improvement in their situation. You cannot compare to the "don't make the original mortgage loan case" and say that because they're "giving away" $65K in value that it's the worst of their available options.
> No - you were claiming that this sort of deal made sense for a bank.
Please show me the text that makes that claim. (I happen to think that it does, but I don't believe I actually made that claim.)
> And, there are many deals that a bank can do, so inventing one isn't actually all that interesting.
> The relevant deals are profitable.
There are many. OK, please propose maybe two alternate deal structures under the above facts/circumstances that are materially different and better for the bank. (Saying they'll take 18% equity for otherwise the same loan mod is not materially different IMO, even though it's obviously better for the bank.) Ideally your proposed deals would have a chance in hell of the bank offering and the borrower accepting.
> And, you still haven't addressed the real problem, that the vast majority of these folks can't afford an $800K loan either.
The fact that people who once got a million dollar mortgage and now can't afford an $800K mortgage is not my problem to address. I didn't loan them the money, and unless they're in my neighborhood, it's such a vanishingly small part of my damn business or concern that I'll choose to spend time on things that do matter to me or that I can influence.
If the bank lent to someone who couldn't possibly repay on the day they took the loan, that person needs to get foreclosed on, the bank needs to take the losses and look at its underwriting standards, and the borrower should have their credit rating dinged for their own irresponsibility.
If a job loss or income change prompts the foreclosure, then I feel more sympathetic to both the lender and borrower, but some portion of loans are going to go bad, and in the "less than 20% down" loans, the bank was knowingly taking larger risks, so I don't feel too bad about their larger losses. The borrower in this case has still made and failed to keep a commitment, which speaks to creditworthiness, so again the credit downgrade is fair/appropriate, even if it seems like "piling on".
For people who could afford an $800K mortgage (and many of them could afford to keep current on their $1mm mortgage), but there are some who would choose not to because their mortgage is non-recourse and they're far enough underwater on the house that it's literally in their best financial interest to walk away. Those people are the ones for whom a loan mod could make more sense to both sides than a bank foreclosure.