Would bailing out Main Street by forgiving most residential mortgage and home equity loans help the housing crisis? Or make it worse?

We recently received the following letter:

Instead of the Eminent Domain proposal in California, how about this: Create the Bail Out Main Street Act 2012. Congress would immediately write and approve legislation to force all banks and financial institutions to do a one-time write-off and forgive all residential mortgage and home equity loans with balances that total $600,000 or less.

This bailout would apply to primary residences only. Owners of investment, vacation and commercial properties would not be eligible. The bailout would be open to individuals or families with income of $300,000 a year or less.

Financial institutions and banks have created a global depression and economic hardship for most, if not all, Americans with their unbridled greed, disregard for the law and extreme risk taking with others people’s money. They are not being held accountable and were primarily saved from being wiped out of existence by the United States Government, also known as the people of the United States.

It is time for all banks and financial institutions to be held accountable and give back for the greater good. Wiping out all residential mortgage balances of up to $600,000, would restore the global economy, stimulate and increase consumer spending and actually give the banks new business opportunities.

Main Street Americans, the people hit the hardest in the current economy, would actually be able to save money for their family’s future, spend money without going into further debt and invest money back into the financial system.

New laws and regulations are needed to end, for the lack of a better term, the racketeering that has been going on the past century.

In the recent past the financial industry have been found to be price fixing the LIBOR interest rate, which is the benchmark for all mortgage rates, they gave mortgage loans to people who they knew couldn’t afford them with sub-prime rates negatively amortized, sold this highly risky debt via other financial instruments and took out insurance to protect themselves when these loans failed, which they knew was going to happen.

Last but not least they recommend to retail (i.e. Main Street) investors to buy stock in specific companies while they are selling all the same company’s stock because they know the truth and control what is a rigged game or scam. Or they manipulate stock prices with high speed computers and black box trading programs – with a few million dollars to trade it is very easy to manipulate a stock price.

The mentality of all banks and financial institutions that they are doing no harm and nothing matters except profits for their company must change. At the end of the day none of them would exist without everyday people.

The Bail Out Main Street Act 2012 would be the first step in a global economic correction that would actually work. For the record I am a conservative Republican, former business owner, believe in capitalism and making money…but not on the backs of or deceiving others.

A: Thanks for your email. It’s clear that you’re angry with the financial institutions in this country (and perhaps around the world). Blaming the banks for everything that has happened is a popular idea, but there’s blame to go around.

What about homeowners who were so desperate to buy bigger and better and were willing to take zero down loans with adjustable rate mortgages? The demand for these products was there, and banks took advantage and pocketed huge profits.

The housing crisis has exacted a huge toll on our economy, and while one hopes we’re through the worst of it, it remains to be seen how long we’ll stay here, in a very slow recovery.

Now let’s turn to your Bail Out Main Street Act 2012. Well, we’ll give you credit for an interesting idea, but we can’t imagine how or why the U.S. government would push lenders to forgive all mortgage debt of up to $600,000.

That is so much money, and it really rewards those who should have known better and who can certainly afford to make their mortgage payments.

To be clear, you’re talking about trillions of dollars in mortgage forgiveness that would effectively sink most big banks under the weight of those losses and investors around the world that hold securities tied to those mortgages. Someone has to make up the difference between what is owed and what would be forgiven. At some point in time, once you’ve pushed paper back and forth, it’s real money out of someone’s pocket.

Furthermore, you’re talking about extending this to anyone who earns $300,000 or less. Homeowners who earn $300,000 a year, or even a whole lot less, don’t need a massive bailout. They don’t even need a small bailout. What they need is to refinance their loans to take advantage of historic rates, and pocket (or spend) the difference.

So while the California eminent domain proposal is controversial, yours may be over the top. But, perhaps that was your point.

Thanks for writing.