I've come up with a plan to help main street while helping wall street at the same time. No one wants to give anyone (mainstreet or wallstreet) a complete get out of jail free card, but the necessary evil is that something must be done, or we must struggle through an enormous recession and downturn in the economy. Since the decision has already been made to do something, this article focuses on what should have been done to help mainstreet instead of just bailing out wall street's bad debt.
Step 1: Government buys all "upside down" loans and loans where the LTV is greater than 80%. The central reason for this economic downturn is the decline in housing prices. Average homeowners see their largest asset suddenly turn into their largest debt as they owe more on thier house than it is worth. If the government is going to spend a massive amount of money, I would argue that money would better be spent on something that would primarily help the average tax payer while providing an outlet for banks to get rid of potentially toxic loans at the same time. The most risky loans out there are loans for more than the house is worth, or loans where the loan to value is greater than the historical standard of 80%. If the government is given the option to buy these loans from the banks (at a discount that the banks would pay for), the banks would suddenly have a way to get all of these loans off of their books -- help for wall street, but at a penalizing discount too.
Step 2: Government resets these loans to 0.00% interest. Yes, that's right zero percent, zilch. Suddenly homeowners are paying 100% principle in their monthly payments, and their monthly payment go down by hundreds of dollars a month. People who were tempted to take the foreclosure route before, would now be crazy not to take advantage of 100% principle payments -- the opportunity of a lifetime, so these people will more than likely stay in their homes. There would be no reduction in principle owed so main street doesn't get a complete bail out either.
Step 3: When LTV reaches 80%, loans are reset to original amoritization schedule. When the loan to value is back down to a reasonable level, like 80%, the interest rate kicks back in. Yes, the payments go back up, BUT there is an incentive to make the payments now that you have 20% of your home's value. If you can't make the payments, you should be able to sell your home and at least break even. This works because presumably these loans will reset at different times, thus avoiding a sudden influx of home inventory on the market.
Step 4: Change the rules. Writing bad loans, wall street creating credit insurance worth many more times than the actual loan values, and preditory lenders all need to be curtailed. Capitalism is great, but only with laws and rules to ensure that no one cheats the market or each other.
Is this fair? No, not totally. Those who have not indulged or who have wisely paid down the balance on their home won't get any direct help. However, everyone will see their home values stablize and begin to trend upward again with the deflux of inventory from the market. This won't be a permanent solution, unless things are done to ensure that homes are not being bought that shouldn't be and people are not getting the kind of loans they shouldn't be, otherwise we will be revisiting this situation again in the near future.