Mortgages, values, and modifications

[Perfect7]

I've been reading a lot on this stuff, and I'm trying to get this straight in my head. A home is purchased for, say, $200,000. The buyer procures a loan for $160,000 (paid 20% down, theoretically). The $200,000 goes to the seller, and the $160,000 is owed to the lender. Home values take a hit, and now the house is worth only $120,000. The buyer still owes $150,000. Interest rates change, or the buyer loses his job, and suddenly is no longer able to pay. He applies for a modification.

Here's where it gets complicated. The lender, who has already paid the entire amount borrowed to the original seller, is being asked to change the loan to the amount the house is worth (or less), with the buyer stating it is unfair to require the whole amount when the house isn't worth that much anymore.

But the lender did what was expected originally, right? And the money was given to the seller, so it isn't really the lender's responsibility to change the loan amount WITHOUT GETTING PAID BACK. There is something wrong with this picture!

I can see, from the buyer's point of view, that it just seems wrong to have to pay that much when the house is no longer worth it. At the same time, the buyer OWES the lender the amount agreed, period. If the buyer can get the original seller to give the lender the difference, THAT would be fair (but I am certain it won't happen), but to make the lender receive less than agreed is not right, in my opinion.

Adjusting the INTEREST, on the other hand, is totally within the lender's power and the lender OUGHT to be willing to drop THAT amount some, especially when the percentage has gotten way out of hand.

This got long, but it's been churning in my brain, so I thought I'd let it out. ;-)

[spacelover8126]

I can see both sides of this as well.  Automatically lowering the interest rate is an interesting solution, but aren't most home mortgage interest rates pretty low as it is?  How low can they be expected to go, especially for those with less than stellar credit history?