Most people out there have a sense of fair play and when we see our neighbors in trouble wouldn't think twice about helping out. The current legislation to help homeowners facing foreclosure is a very sticky situation. Senator Dick Durbin wanted to put an ammendment to permit judges to change the valuations of mortgaged property as well as the interest rates on those mortgages. This is called "Cram Down". While this sounds like the fair thing to do considering our present economic situation nobody considered the other side of the equation here. That would be that money for mortgages comes from investments and where do those investments come from? A whole bunch comes from retirement and pension funds invested long term providing monthly checks to grandma and grandpa along with a lot of other retirees. Could you imagine the banks having to send a letter to grandma telling her that because mortgages had to be restructured and the interest rates lowered that her monthly pension check will now have to be less as well? You could just imagine the uproar.
So what's the solution. My guess if this works out even close to fair would be that homeowners can get a new mortgage yet the terms may be gradually changed. The banks will have to write off more of their losses and bondholders will have to take a bit of a bite and tax payers will need to wait for any return. Everyone will just have to give a little. The alternative? Foreclose on all the bad loans. Demo the house. Tell the investor he's lost. Close the bank and watch as the entire economy hits rock bottom.