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Foreclosure crisis phase 2: The negative equity dilemma

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Is there a solution? Yes, but it's controversial. Congress would have to force banks to write off part of homeowners' troubled loans as a way to keep them in their homes.

There are plenty of reasons to avoid this course. Chief among them is the moral hazard. If banks write down one homeowner's loans because of hardship, what's to keep other homeowners from claiming hardship, too? And the losses don't accrue to some faceless bank; they add up for individual shareholders and pension funds that have money tied up in mortgage loans.

"In a way, reducing principal is like rewarding [homeowners] for backing out of an obligation," said Stan Longhofer, director of the Center for Real Estate at Wichita State University in Wichita, Kan.

But the current program isn't working either, critics say. And the debt write-down happens anyway, whether a homeowner goes through foreclosure or the house is relinquished in a short sale. So isn't it better, they ask, for the bank to take its losses early and keep the owner in his home?

Foreclosed on, but kept his home

Osazee Egharevba, a Nigerian immigrant who came to the Boston area in 2000 after his wife passed away, worked two jobs and saved enough to bring over his five children in 2006. That same year he purchased a two-family home. He could afford the $3,950 monthly payments by renting out the first floor.

Then Mr. Egharevba lost one job, and the extra $800 a week it brought in, and started missing payments. Deeply "underwater" on the $510,000 property (owing more than it was worth), he was foreclosed on this past winter, after five failed attempts at attaining a loan modification.

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