We put $300,000 down on our house.  It has depreciated about $100,000.  I have lost $100,000 and the bank hasn't lost anything.  I can't write down my loan for the depreciation because the loan is still less than the house.  The people the government is looking to bail out didn't put any money down and their house depreciated $100,000.  If they go to find a new loan, the bank will have to take the $100,000 hit and nothing happens to the home "owner". 

No one knows when the housing market will stop it's downward spiral so investors and the market have no idea how much they will actually lose.  The bailout is designed so that the government will buy these bad loans from the lenders.  The lenders will sale them at a loss but they will get rid of them so they can finally put a number to their loss and it will make the street a little less jittery.  The government is going to then work with the "owners" to lower the principal on the house and lower their rates.  Remember, the government is me and you; it's our tax dollars that are just being erased by dropping the principal of the mortgage.  The owners now owe less on their house and I still owe the same.  They get a better rate and mine stays the same.  This isn't fair to any tax payer and it sends the wrong message to our kids: if you screw up, the government will bail you out. 

The market is bad and people losing their houses is not acceptable so we have to do something.  Read my idea to help after the jump.

Here's a very common scenario of why the govermnet is stepping in: Let's say John Doe took out a zero down, interest only loan in 2006 for his $500,000 house at a 3 year, 5% ARM.  John's monthly payment is $2083.33 and his principal stays at $500,000 every month.  In a few months his loan will reset to interest + principal and it's going to be at the market rate.  I'm going to go low on the rate and say it's fixed at 6.375% (in reality, it's nowhere near that low and it's not fixed.)  John's payments will become $3570.93 per month, an increase of $1487.60 or 71%.  Again, it's an ARM so it's going to go up each month and it's going to be much higher than 6.375%.  Let's say John's house has depreciated $100,000 so it's only worth $400,000.  If the government's really serious about helping out John and not just the lenders (the jury is still out on that) then they will write-off the $100,000 and turn John into a fixed 30 year loan at 5%.  This would make his payments $2147.49 a month, a $64.16 increase that doesn't go up each month.  Fast forward 15 years with the market bouncing back. John sells his house for $550,000, his loan was $400,000 so he profits $150,000.  I've heard that he owes the government some of that, but I have been unable to find the numbers.

Here's my idea:  If the government is serious about helping him and they want to please the taxpayers, don't write-off any of the loan.  Instead, give John a fixed rate for 100 years.  If you take the $500,000 and give him a fixed 5% for 100 years, his principal + interest  payments would be $2097.61, an increase of only $14.28.  If his house appreciates, the tax payers (or their kids or grandkids) still get their full investment back.  If his house continues to depreciate, he better like living there!  This would take some of the burden off of the tax payers, it would give a better guarantee of tax payers getting their money back, it allows John to stay in his house and it will make me a little happy to know that even though I'm paying more for my house, I will pay it off 70 years early!

I've heard that if someone short sells their house right now, they don't take a hit on their credit.  Can anyone confirm this is true?  It should hit their credit the same as a bankruptcy!