Scenario #1: Every mortgage payment has been made on time.

• The homeowner knows that their house is worth $75,000, even though, they owe $100,000.
• Under current rules, the banks and the mortgage backed securities which own the mortgage, are required to say the house is worth about $75,000. Since banks have strict capital requirements by the Fed (unbelievably complicated), writing down this asset by $25,000, generally, means the bank will have to raise capital to make it up by selling about $1,000 in new stock or attracting subordinated debt (or other methods) which may be really hard to do when your stock is in a spiral.
• Meanwhile, investors in the banks and the mortgage backed securities which own the mortgage, buy or sell based on their guess whether they think the companies are telling the truth on a timely basis, and, generally, don’t believe anything leaving the stock and securities prices in the toilet.
• The banks, Wall Street firms, the Treasury and the Fed want to value it at $100,000 and have our government guarantee that it is. The mortgage is performing as if it is worth it is worth $100,000 and if held until maturity it would be, therefore, it is. Read the rest of this story
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