For mortgages, contract is a contract

I am unable to understand the U.S. housing/mortgage problem, especially underwater loans. Say in 2006 a couple purchased a $300,000 home with a 30-year mortgage and monthly payment of $835. They sign a contract with the lender to make these payments. There are no clauses that say if the value of the home goes up, the monthly payment goes up, and if the value goes down, the payment go down.

In 2010, the market value of this home drops to $150,000. They go to their lender and say they should only have to pay $417.50 per month because the value is half of what it was when purchased. The lender goes to the government (taxpayers) and says that if the government will pay the lender the lost $150,000, the borrower can now make the $417.50 monthly payments and continue to keep the home.

This is akin to buying a $60,000 SUV with five-year financing for $1,000 per month and after two years the resale value has dropped to $30,000. Is the car dealer going to refinance this vehicle at $30,000 and get $30,000 from the government? I don't think so.

Years ago, a contract was a contract. To get a home loan, you needed mortgage insurance. The monthly payment included an escrow account to pay the taxes and insurance.

What happened?

Dell Fossum

Decorah