Should the government get involved in helping reduce the loan amounts on underwater mortgages?

If structured well, I think the government can help rework loan amounts on troubled mortgages. But ultimately, the homeowner should not gain the benefit if the home increases in value years later. Any amount absorbed by taxpayers should be protected by recording a silent second trust deed.

For example, if a family purchased a home for $325,000 with 100% financing, and similar neighboring homes are selling for $250,000– the homeowner could apply for a fixed rate 30 year mortgage for $250,000.

The amount of money that remains, in this case $75,000, would be secured by a new second trust deed on the home. This second trust deed would be paid before the seller would see any profits from a future sale. At the time of sale, if the home value is still too low to repay the entire $75,000, the remaining amount could be forgiven. It could also be interest and payment free for the first five years.

Because housing values tend to rise over the long term, this would allow most of the money to flow back to the taxpayers over the years. These loans would be limited to the amount used to purchase the home. Subsequent home equity lines of credit or cash out refinance amounts could not be forgiven, and the process would be a bit more complicated.