Its nuts.
Part of the reason why this problem began is because there was a problem (recession) that was exacerbated by Sept. 11th and the Federal Reserve threw a bandage over it. That bandage was incredibly low interest rates. The markets in general are complicated and intricate. Look at what goes into supporting our economic system :
1) You have Sally Mae, Fannie Mae and Freddie Mac acting as final buyers of educational and housing loans. They're managed (in a general sort of way) by the government as a way to increase "liquidity" or basically make it financially intelligent for banks to lend to people they otherwise wouldn't lend to under such terms. So the bank goes and sets up the loan then sells it off to more or less a government entity that then backs that loan.
2) The loans are also repackaged into bonds, put through a food processor, diced and spliced together and then resold off. Who is the major market for these loans? States, cities, the federal government, etc. They are the number one purchaser of these loans and they use them to meet pension obligations. So when you're complaining about how post office employees have a better retirement plan than you do, bear in mind part of the reason they have that plan is so that we can keep our housing market going. So we can artificially force our economy to grow and grow and grow.
3) Bankruptcy revision laws make it substantially harder to go bankrupt on debt. There's a lot of issues with this. In ways it helps lenders but in a lot more ways it hurts the economy as a whole by plugging the "release valve" we have in place.
4) That's not even getting into other credit instruments and consumer spending.
So basically, we put a bandage on a problem and that bandage spiraled out of control into a worse problem. Then we go and we have the federal reserve reduce its lending rate to banks and allow them to collateralize those loans with CDO's that are drastically devalued. On top of that, we're going to prevent resets on these mortgages and allow term alterations.
Who does this help anyway? Well, lets see who it doesn't help:
1) If you aren't a homeowner on the verge of default - this doesn't help you. If you're honest you probably won't be elligable.
2) If you're a shareholder of a bank, this doesn't help you. This plan will cause the bonds to differentiate from LIBOR and several of the sales agreements for these credit derivatives (including the SIV's Citigroup underwrote, for instance) include provisions that obligate the seller to repurchase the asset at original cost if there are issues with it. That means that these banks have to repurchase these assets and then, because they don't move with LIBOR any more, accept yield erosion due to the fact that they aren't moving with the interest rates anymore.
3) This does nothing to improve lending environment or home sales.
4) This will ultimately increase cost of living in the form of hidden taxes on land, goods, etc at the local level and federal level.
5) If you're on the verge of default over this, this plan probably will only delay the inevitable anyway. It'll spread out the defaults but it won't stop them.
So who benefits? A couple politicians, mostly. We're going to throw another bandage on the problem. It doesn't really help anyone involved or the people as a whole. Five or ten years from now when it causes more issues we'll look back and say, "Wow, Paulson was a dumbass for that."
