The housing recession the worst in US history and worsening every day will eventually see house prices fall by more than 20 , with millions of Americans losing their homes.

Yet today, we see the U.S. government readying 700 billion to brazenly bail out banks, mortgage companies and insurance companies.

Meanwhile, insolvencies and foreclosures triggered by excessive interest burdens are not reversed by later rate cuts.

When normal mortgages did not prime the pump enough, he encouraged them to take out variable rate mortgages at a time when interest rates had nowhere to go but up.

The Right Weights for Mortgage Risks

Occupy the Mortgage Lenders

So far, the sub prime crisis has had a limited direct impact on Latin America s mortgage markets.

Losses are spreading from sub prime to near prime and prime mortgages, commercial mortgages, and unsecured consumer credit (credit cards, auto loans, student loans).

In the US, by contrast, 21 of adjustable rate sub prime mortgages are 90 days late or in foreclosure.

What started with subprime mortgages spread to all collateralized debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi trillion dollar credit default swap market.

Mortgage debts, too, must be written down.

But lower short term interest rates have led to higher medium term interest rates, which are more relevant for the mortgage market, perhaps because of increasing worries about inflationary pressures.

After the subprime crisis erupted, mortgage and consumer debt was paid down by households either with their savings or by default.

An interest rate rise might take the heat out of the mortgage market, but it will also chill the rest of the economy.

Some of the innovations associated with the sub prime crisis notably option ARM s, when extended to borrowers who couldn t handle them seem to have little redeeming value.

Mortgages became more widely available.

Mortgage brokers were happy to get in on the act.

It was called securitized mortgages.

Unlike virtually every other country, US residential mortgages are effectively no recourse loans.

Indeed, the foreclosure rate is increasing.

The problem was not just sub prime mortgages.

Even if the US Federal Reserve continues to lower interest rates, lenders will not rush to make more bad mortgages.

Moreover, the US housing market appears to be stabilizing....Overall, the US mortgage market has remained resilient, although the sub prime segment has deteriorated a bit more rapidly than had been expected.

a rapid reduction of insolvent households debt burden, preceded by a temporary freeze on all foreclosures

As a result, mortgage brokers maximize their income by generating larger volumes of mortgages, as do the banks that package these loans into mortgage backed securities (MBS s).

Insurance companies and mortgage companies ought to be willing to offer such products if they can hedge the home price risks in liquid derivative markets.

In Mexico, all mortgages carry fixed interest rates, unlike the infamous exploding ARMs that left US homeowners ruing their choice of adjustable rate mortgages when interest rates rose. Mexican mortgages are indexed to inflation, but the state mortgage agency links that index to the minimum wage and makes up the difference if mortgage interest adjustments for inflation outpace wage growth.

But mortgage markets remain underdeveloped in most emerging economies.

What is needed is a quick write down of the value of the mortgages.

In the fourth act, the real estate bubble will burst.

Its members could not agree even on how to define subprime mortgages and calculate how many such mortgages there were in the United States at the time of the crisis.

But even if the intellectual objection to extra revenue can be overcome in this way, the practical political problem is that every large tax expenditure the home mortgage interest deduction, the exclusion of employer payments for health insurance, etc. has its fervent defenders.

The state is an epicenter of the housing bust and the foreclosure crisis.

Around sixty sub prime lenders have already gone bankrupt.

Some limited previous experience with mortgage modifications is not encouraging.

But Greenspan would have served the country and the world better if he had been somewhat more paternalist in slowing the growth of non standard adjustable rate mortgages.

Lower interest rates worked (a little), but for the most part by encouraging households to refinance their mortgages, not by stimulating investment.

In short, QE lowering long term interest rates by buying long term bonds and mortgages won t do much to stimulate business directly.

The second way that QE might have a slight effect is by lowering mortgage rates, which would help to sustain real estate prices.

Wall Street has polluted the economy with toxic mortgages.

Sub prime mortgages made the American dream come true.

One place to start is the tax deduction for interest payments on home mortgages.

The sub prime crisis has exposed serious problems that we must address.

Reducing the face value of mortgages and providing the upside in case home prices were to rise in the long run to the creditor banks is another way to convert mortgage debt partly into shareholder equity.

Many banks have already acknowledged their open ended losses in residential mortgages.