Toxic Assets. How toxic are these assets? How about a formula?
(Number of total home loans) x (Fraction of those loans prone to default)
And the formula for the fraction of the loans prone to default might have a breakdown. My first try at an underbaked one could be:
(Fraction of loans prone to default) =
(Fraction of defaults caused by predatory lending practices)
+ (Fraction of defaults caused by upside down property values)
+ (Fraction of defaults caused by financial hardships)
Since we're throwing some mad dollars around, here, why not throw them straight at the problem? The debtors.
Create a fund to which all homeowners in danger of defaulting on their mortgage payments to be able to borrow up to 20% of their house payment, once a month, for 24 months, interest free.
Only those who currently pay income taxes in the last 3 years and have a mortgage in default are eligible. Why? Because one way to get the money to you could be a combination of tax credit and tax holiday.
If you both have paid income taxes, and are sure you don't need the program, you get a tax credit for some arbitrary value of the interest, for the money you didn't need to use. The IRS should be directed to share information for those who want help with a fraction of their mortgage payment. This much can be pre-administered.
If you need help with more than 20% (or some other arbitrary percentage), you're in over your head and really are beyond help. If your problems are no larger than the arbitrary percentage, hopefully this will add up to enough relief to get you through the next two years, like the financial hardship unemployment insurance is there to help you through. Sorry if you can't quite squeak over the arbitrary line, but there's got to be a line somewhere, and preserving your neighbors' equity should help you indirectly at least. Another thing: Four years from now, you will either have to have had your mortgage renegotiated, your home sold off, or start to make payments back on principal.
I think allowing bankruptcy judges to renegotiate mortgage deals is a great idea, that will help matters immensely just by that law being on the books.
I think a significant liability should be assigned to the creators of the "liars' loans," not that it will be.
This will help detoxify the toxic assets, directly assist those with the default problem, and put the public money exactly where it belongs, around the institutions that should go under.