Bank 'haircut' can save homes

Why some lenders choose principal reduction over foreclosure

In a recent column, we explored some of the steps suggested by longtime housing experts that would allow traditional forces to return to the market.

While the initial moves are not easy, they are somewhat logical: Scrutinize the loan qualifying process, subsidize those who would be temporarily displaced from the homes they could never afford to begin with, and instruct lenders to reduce principal loan balances for qualified borrowers.

The amount of the reduction probably would be dictated by the borrower’s present equity position and income. The goal is to eliminate some of the inflated appreciation brought by years of cheap money and overheated demand.