The BBC has one of the best articles to date explaining the sub-prime crisis. The fix is relatively simple but also remarkably painful. Those that cannot afford their home under a 30-year mortgage need to be foreclosed. Those that can, but were pushed into sub-prime loans need to have their mortgages rewritten into more acceptable 30-year mortgages. At that point, the mortgage bonds need to be re-evaluated. There needs to be a massive fraud investigation to find home appraisers, mortgage brokers, banks and rating agencies who profited from issuing these bad loans on properties. The proceeds should go to those currently holding the mortgage bonds to help compensate for their losses.
Even with this type of radical spring cleaning, I highly doubt any of this is going to be pretty. Since, many people were refinancing their homes with sub-prime mortgages and spending the difference. Whatever they bought is unlikely to have the rate of return needed to cover the sub-prime rate change. In short, there are going to be a lot of foreclosures, and there isn’t much anyone can do about it unless we flat out give people money to make their loan payments. A prospect that many, including myself, find unpalatable. It is a classic example of a moral hazard since it encourages irresponsibility.
This crisis will be a drag on the economy and it is going to take years to sort out. Unfortunately, given recent and past Bush administration policy and attitudes, victims of the sub-prime crisis shouldn’t count on competent government assistance. We are staring down another domestic crisis with a government with a proven track record of turning every crisis into a disaster.