I am not an economist, an accountant or a banker.  However I am a lawyer who has spent most of his 25 plus year career working for local governments and handling consumer bankruptcy cases.

As a local government attorney, I worked with bond counsel in transactions which are  similar to the securities which underlie the current crisis.

As a consumer bankruptcy attorney I have first hand experience with dealing with debts and devising plans to deal with that debt.

I have also dealt with these problems when housing prices have gone into a freefall and before the Supreme Court ended the practice of mortgage strip downs in Chapter 13 cases in 1991.

The way to solve and analyze any problem is to break it into smaller pieces.

They say that mortgage backed securities are novel.  This is nonsence.  Local governments have been doing it for years.  If your county needs a new jail, or your city wants a recreation center, they issue bonds (or Certificates of Participation), in which the jail or recreation center is used as collateral.  It's also how local roads are financed:  bonds are sold and the proceeds from a gas tax are used to pay these bonds.  If there is a default, these assets are even more difficult to foreclose on than homes.  I mean how many people want to buy a jail or rec center?

Similarly, a lot of people say that the homes which are the subject of these loans cannot be valued.  Again, this is nonsense.  Just about everyplace in the United States has property taxes.  These property taxes are based on the value of the property.  This value is determined, in many cases, by a county assessor.

The valuation of the homes is not magic.  Whenever a home is sold, the sales price is reported to the county assessor, who feeds it into a huge database.  Values are determined by mass appraisal, where numerous factors (square footage, age, number of bedrooms, etc.) are fed into a computer, which spits out a value for the property.  These values are a pretty accurate indication of the value of the property because they are based on actual sales numbers.

All the talk about bankruptcy court judges adjusting mortgages is also a lot of hokum.  Years ago, when I did Chapter 13 cases, I did them for two reasons: to deal with tax debt and to strip down mortgages.  The former reason ended with the 2005 changes to the bankruptcy code, and the latter with a 1991 decision by the U.S. Supreme Court.  In short, there is no rational reason for anyone ever to file under Chapter 13.

To put it mildly, it seems crazy to force someone into bankruptcy to adjust an upside-down mortgage, especially when the adjustment is going to be preferable to foreclosure.  Any sane person faced with the demands of the servicing companies (keep in mind, outfits like Countrywide make money doing foreclosures) or being asked for thousands of dollars in attorneys fees to do a stripdown in bankruptcy, will simply walk away from the transaction.  People really do not have a desire to engage in heroic efforts to save a home with no equity.

The answer is deceptively simple:  refinance all of these "creative" loans with standard fixed rate 30 year mortgages underwritten by the Federal Government.  These loans would be based on the appraised value of the property, and the proceeds would pay off the goofy and fraudulent mortgages currently on the property.

This, by the way, is the absolutely best outcome the holder of the mortgage backed securities could hope for, short of Bush throwing the doors to the public treasury wide open.  If the homes go into foreclosure, there is no way that the trustees, who actually own the mortgage are going to get fair market value.  And when they sell the homes for fire sale profits, it only further depresses housing values.

After the mortgages are refinanced, the holders of the mortgage backed securities are paid off for the actualy and reduced value of the securities.