David Lentz

Options Trader: Tough-Decisions Tuesday

There is an even cheaper way to stop the madness.

Simply require that all holders of ARMs convert them to fixed-rate mortgages, at the going rates that the GSEs offer.

To prevent the lenders from getting a haircut, and taking all the pain, merely extend the terms of the new mortgages such that the lenders will ultimately receive all the interest that they would have if the ARMs had continued, or some reasonable fraction of that money.

The net impact of this is that the borrowers that are in over their heads get effectively converted to renters, with mortgages of over a hundred years on houses whose value is below the amount on the mortgage.

So they can't sell the homes until housing market valuations recover, but they are also not forced out of their homes, dumping the repo'd properties onto a scrap heap that is crushing the industry.

In the end, these folks are probably toast anyhow, but at least it does not happen in just a year or three, but instead is spread out over decades, with unlucky individuals facing up to their problems as they are either forced to move or suffer economic calamities (lose their jobs, divorce, etc) that place them in the position of having to deal with their under-water mortgage.

This would immediately stop the inventory build-up in unsold housing, would allow millions of homeowners to remain in their homes (albeit saddled with a debt burden they will, in all likelihood, spend the rest of their lives paying off), and allow things to stabilize in the ravaged housing industry.

Then we can have a measure of sanity (not too much, as that wouldn't be normal) in the financial industry, and begin to lay the groundwork for a recovery. The powers that be would have the time necessary to implement a sane regulatory framework -- instead of some emergency claptrap that will be riddled with a whole new set of problems, which is where we are heading now.

It's really easy to bring all this to a responsible conclusion. Instead our collective head is on fire, and we are attempting to put it out with a hammer.