Wow! Isn't this what got us into this mess in the first place? If these mortgages in trouble now are not allowed to fail now they will just fail in the future. Seems like a theme nowadays.

In my opinion, your house and your stock picks should have one thing in common: They should both be considered long term investments. If the homeowner picked a home in a decent neighborhood and it has all the features they need, then there is no reason to believe that it's value won't increase by the extra 25% over the next 5 to 10 years. If the loan amount means payments higher than they can afford, they purchased too much house to begin with and borrowing more money you can not repay will not fix the problem. Selling your home, or your stocks, just because they are suddenly valued at much less than your purchase price is pretty much like admitting you made a bad choice to begin with and want to compound that error by not giving that asset a chance to recover. A refi on a home isn't going to make the payments much more favorable unless the new loan is at a better interest rate. My hope is that the new 125% loans slow foreclosures, but that is not too likely, except in a few cases where a new loan drops the total monthly payment. Let's all pray that we aren't encouraging another round of reckless borrowing.

For some reason I am thinking the two examples you cite would be excluded because of the loan amounts. I believe there was a cap on the maximum allowable well under the half a million threshhold. I'm thinking this because I remember thinking that California residents were pretty well and truly screwed since there was major property inflation out there and housing is and was incredibly expensive in their market.

Naked capitalism blog makes the following point:

Here are two points to consider.

1. In the state of California, you can just walk away because first mortgages on primary residences are non-recourse. That means that the mortgage is only secured against the house you have bought.
2. However, in the state of California, refinance mortgages are recourse loans. What does that mean? It means you are on the hook for that loan. You cannot just walk away. The bank can come after you and take your car and the stocks in your E-Trade account. They can garnish your wages. They can even take your clothes and the shirt off your back, literally. The only thing they can’t touch is your 401-K. But it’s down 40% anyway.

Why would you trade a non-recourse loan from which you can walk away for a recourse loan that guarantees you’ll end up as bad as some poor slob at Tappahannock? It doesn’t seem like an incredibly appealing choice, does it?

This article also points out that if you take this step, you may want to be sure that you don't want to move in the next 13-17 years:

http://seattlebubble.com/blog/2009/07/02/125-refinance-pricing-you-in-fo...

I'm the person who posted the original article about non-recourse loan. I'm not an expert, but according to here, all refinance loans are non-recourse:

http://www.nonrecourselending.com/non-recourse-lending.php

"The law is different in every state, in almost all cash out refinance loans these are almost always a recourse loan. In short, take the money now, but if you don't pay it back, they are going to come after you in court and with a multitude of ways to get that money back."

These tends to agree with the above:

http://banking.about.com/od/loans/a/recourseloan.htm
http://www.forecloseddreams.com/deficiency-after-trustee-sale

Regardless, I agree that I can't see the Fed Gov. doing this without making it recourse.

This website lists states with anti-deficiency laws (where they can't pursue you for the balance if you walk away) and hence by refinancing you are likely to make your situation worse:

http://www.helocbasics.com/list-of-non-recourse-mortgage-states-and-anti...

Alaska, Arizona, California, Connecticut, Florida, Idaho,
Minnesota, North Carolina, North Dakota, Texas, Utah,
Washington

Notice the list contains some of the top hotspots for house prices drop. It's possible that the ability to walk away in these states may be part of the reason...

maybe 125 works out in the midwest, not in California, where the bubble was big.

we still have to see the prices knocked down in santa monica

our bubble was huge. i've seen houses priced at over 500k now asking for 230k, and probably won't sell for more than 200k. there's no 125% in that. this is in a working class neighborhood.

> Will this help consumers or just worsen the situation?

It will help the banks to avoid writing down the values of their assets. Instead the taxpayers get burdened with the risk of the mortgage default (Fannie, Freddie, FHA are all guaranteed by the taxpayers now). The US government is currently of the banks, by the banks, for the banks, and so it is hardly surprising that they want to limit the banks' losses and allow them continued bonuses and high salaries to their executives, instead of an unwelcome transparency. That is good for the members of congress, too, whose largest campaign contributors are from Wall Street.