A nice short idea that to my (economically) untrained mind would seem to put the brakes on the housing mess.
It seems that the main issue with the economic challenges that are confronting us right now can be boiled down to: no one is sure what they own. Be it the homeowner who might be upside down, or the banks that are not sure what type of bond they just bought. Everyone is unsure of what they own, and are therefore being very careful with what they know that they have.
So how do we get out of the rabbit hole? My WAG below.
I think that, again I am not an economist, just a lowly physics and math teacher, that if we can restore confidence most of the other issues will be greatly reduced. To do this I suggest that banks that own the troublesome mortgages consider "revaluing" them. By this I mean rewrite the mortgage to reflect both the ability of the homeowner to pay the mortgage, and with the current market conditions for the value of the home considered.
Hypothetical example: a home bought for $200k with 10% down might have had a monthly payment at about $1000. (Nice round numbers for those afraid). Maybe the adjustable rate kicked in and the new payment is $1750, and with other bills it is no longer able to be paid. The owner finds that the market is now saying that the home is now worth $150k, and the owner will need to write a significant check to sell the house. If the mortgage is then redone to reflect both the ability to pay, and the current value of the home, the bank then does not need to worry about forclosure, the owner can then get back to making payments on time, and possibily buy other items, giving a further boost to the economy.
I know that banks would never do this because of the cost of the writedown, but, and this is a question for someone smarter than I, would that cost be greater than the write offs they are currently making, in addition to the costs to the economy as a whole?
I would think that if a bank were to do this to their portfolio of mortgages, maybe just those that have had a large jump in an adjustable rate, but with a history of payment at some level (125% of original payment maybe) the bank could then be sure of what it owned, get that AAA rating back, and get great press in the meantime. Further, the real estate market would then be effectively revalued to realistic values, allowing the rest of us to be relatively certain as to what we own, giving us some confidence. I would think that the foreclosure rate would plummet, those that are currently upside down would at least have some knowledge of how far under they are, giving them some certainty, and maybe the ability to petition the bank to revalue their loan.
Downside? The banks take a loss, but again, would that loss be greater than what they are currently facing?
Well that is my wild ass guess, and just maybe a way out.