-you are suggesting a market solution, specific to lenders and borrowers. I am all for that. That seems an appropriate response. A more general gov't mandated freeze/ workout will have unintended consequences.
This subsidy and ALL subsidies/bailouts get "accounted for" with increased prices elsewhere to make up for the shortfall, print-money inflation, and/or currency debasement. Someone gets subsidized at somebody else' expense. It is always thus.
Because those mortgages and their resetting ARM nature are factored into the entire chain of events. These loans were put into pools, and the pools were sliced and diced into securities. Those securities were created based on the resetting nature of the underlying assets. If you go and f#%# with the underlying collateral assets that created the securities, everybody is affected, because they were counting on the floating rate nature of these cashflows - from the firm that made the loan, to the IB, to the security purchaser. Sounds simple on the surface, until you realize you can't pull one strand and not move the entire spider web. Its not just the homeowner, its the entire chain involved with the loan product.
What I find comical about the situation is that the government acts as if the mortgage industry set out to screw borrowers from the beginning. It was the government that mandated fair lending laws which in essence forced lenders to create loans for high risk borrowers. What they fail to understand is that high risk equals high rates. If you feel that somebody is a greater risk for default on a loan, then you charge a higher interest rate to offset the costs you incur when the borrower does default. It is just like car insurance rates. If someone averages an accident every year (and he is the at fault party), his rate is going to be higher than somebody that does not get into an accident. The government wants to come in and say that insurance companies are not allowed to raise his premium. How does the company recover the added costs of his habitually bad driving? They now have to raise everyone's premium. This is going to affect every homeowner in that even A paper borrowers will not get as good a rate as they qualify for because the lenders have to figure in the risk from their less desirable borrowers. Furthermore, the restrictions to borrow will tighten to where people who sit between the two extremes of poor credit and excellent credit will no longer qualify for a loan. Their dream of owning a home will be gone. Then the government in its infinite wisdom will come in and force the mortgage industry to ease it's requirements for a home loan (they are the heroes of the little people), and the cycle will start over again.
I'm tired of people acting like foreclosure puts people on the street and that they need to be saved from it. These people can rent just like anyone else. In fact, they should've been renting in the first place. So instead of allowing market forces to push them back into the appropriate circumstances, we are going to help them to remain house poor for the next 5 years, and then get forced back into an apartment. Wonderful!!!!!! <sarcasm>