Yesterday the Dow jumped 410 points on news that the federal government was talking about a plan to use taxpayer money to buy hundreds of billions of dollars of bad mortgages. According to the New York Times:
While details remain to be worked out, the plan is likely to authorize the government to buy distressed mortgages at deep discounts from banks and other institutions. The proposal could result in the most direct commitment of taxpayer funds so far in the financial crisis that Fed and Treasury officials say is the worst they have ever seen.
I would like to pass on some suggestions from someone I know who has been trying to help people in danger of losing their homes through foreclosure. Many of these mortgages are bad (the borrower cannot make the payments) not because the borrower bought a more expensive house than they could afford but because the terms of the loan were so unfavorable. If these mortgages were converted to fixed rate, 30 year loans at a reasonable interest rate that alone would transform them from problem mortgages into loans that could and would be repaid.
In situations in which the mortgage is for more than the house is now worth and the borrower cannot afford the current payments but could afford a mortgage for what the house is now worth why not have the government forgive the portion of the mortgage above the current market value? If the government bought the mortgage at a "deep discount" then it would likely still be worth more than the government paid for it. It would not be to anyone's advantage for the government to foreclose on a mortgage, leaving a family homeless and the government owning an empty house.
Perhaps there would be reasons why these things could not be done, but they sure seem reasonable to me.