What are you doing here? Run over to Calculated Risk and read Tanta's fisking of FDIC Chairman Sheila Bair's most recent exercise in self-pleasuring via a demand that lenders write down the principal amount of their first lien loans to the "current value" of the property securing the loans, and why it won't work on the scale that Bair presupposes. Read the comments section of that post, as well. Many of the commenters, and certainly Tanta, know what they're talking about, unlike the regulators and the politicians (as one commenter notes, it's hard to distinguish between the two classes) who are attempting to "solve" a problem that only the painful workings of the private markets will ultimately "solve."
How'd you like to be a borrower who honors your loan contract and sees one or more of your defaulting neighbors get the benefit of a reduction in the principal amount of their home loan principal because the government insisted that lenders to "take one for the team" by writing down home loans to deadbeats to a principal amount equal to whatever a current (and you can bet your life "conservative") fair market value appraisal might determine? Why aren't you entitled to a proportionate reduction, as well? If you're going to make a residential mortgage loan a mark-to-market instrument, why not spread the wealth and the pain ? Oh, that's right: because when you borrow money and promise pay it back as agreed, you honor your commitment, regardless of the change in economic circumstances. There's a word for what you are and that word is: SUCKER!.
And when the market value increases in the future, does the lender participate in the upside, since the lender had to participate in the downside? Can the lender force a sale and pocket a share of the "net profits" measured by the increased fair market value of the property?
"Short refis" is an idea that might, in some individual cases, make sense, but as Tanta so well describes, the process of making that determination involves a case-by-case analysis, and does not lend itself to a "systematic, streamlined loan modification" process that Sheila Bair and other fantasists dream about. This is the problem that occurs when you have people in charge who don't understand the business they regulate, but are too arrogant or too ignorant (or both) to admit it.