Reporting on Fannie Mae’s and Freddie Mac’s new program to reduce monthly mortgage payments for those people who have missed at least 90 days worth of payments, The San Francisco Chronicle’s Kathleen Pender reports:

Peter Schiff, president of Euro Pacific Capital, predicts that many homeowners who have little or no equity will stop paying their mortgage and then reduce their income to get the biggest payment cut possible. They could stop working overtime or, if two spouses work, one could quit. After the modification, they could try to boost their income again.

“This is a once-in-a-lifetime opportunity,” Schiff says. “People are going to feel like complete morons if they don’t participate. The people getting punished are the ones who never made an irresponsible decision to buy a house they couldn’t afford.”

How many people will take advantage of this once-in-a-lifetime opportunity? One study shows that as many as 20% of homeowners in the California’s Bay Area owe more  than their home is worth. That’s a lot of morons who may soon get wise to the government give away. And what happens when all these people take the government up on their offer? Financial Times reports:

Most mortgage securities on banks’ books are now marked at a fraction of their par value. Analysts and bankers had been hoping the worst was over, but recent events have called that assumption into question, raising the prospect of further writedowns – on top of the $1,000bn made by global institutions. “The unintended consequences of a series of government actions are putting further pressure on the valuation of mortgage assets,” a senior US banker said.

Wall Street executives estimate the Treasury’s U-turn on using the Tarp and efforts to modify loans had caused a fall of about 5-10 per cent in the value of some mortgage assets. An index of subprime mortgage derivatives, the Markit ABX index, fell 17 per cent in the past week.