First, what rate are you capping? The first mortgage, the second, the HELOC, the credit cards, etc? So, let’s say you cap the 1st? These borrowers are still in trouble with their 2nds and other adjustable loans. Even if you cap both 1st and 2nd/HELOC, most of these folks have been living off credit cards, which are adjustable, so even then this is not a workable plan.

Second, assuming you can cap the rates and do keep these folks in their homes, you are in most cases postponing the inevitable and worse, artificially propping up housing prices based on their initial over-inflated values that rose not because of organic growth in the market as much as it was based on easy/cheap money.

The hard truth that most can’t stomach is that most of these “liar” loans and no money down, interest only, subprime, adjustable loans should have never been made to the folks that took them out. They were simply buying beyond their means based on the premise of continued double digit market appreciation. The hard truth is that people with the average income still cannot afford the average priced house in the markets that are suffering the most, which is where most of these crazy loans were made. That simply means that prices need to come back down to earth so that folks with average income can purchase the average priced home in their market using conventional loans. Until this happens we will continue to have a stalemate in the buying/selling process.

Third, morally and ethically it is plain wrong to reward / protect / condone behavior on the part of lenders and borrowers that caused this mess. What message does that send to the majority of folks that sacrificed and played by the rules? They are the ones that need to suffer the consequences of their actions.

Yes, I’ve heard the arguments that by protecting these folks we prevent the rest of us going down with them. Maybe. I’m not convinced of this, or the magnitude of the damage to rest of us if we let them fail. I think the price of oil is hurting most folks more than the slide in housing prices. Look, here is the plain truth. If you bought a house in the past 5 years with no money down, using a liar loan or other type, you’re screwed. Plain and simple.

Last, it would be an outrage for the Govt/Taxpayers to rescue the financial community, Wall Street and all these borrowers. And, let’s be frank, who do you think will end up holding the bag when this whole thing eventually hits the fan? Yep, taxpayers. Sure FHA can underwrite many loans, but they can’t and shouldn’t shoulder the entire mess…if they do and they fail, the taxpayers are stuck with that one.

I’d be interested in any counterpoints.

JJ