Moody’s released a study showing that only a small percentage, 1%, of subprime mortgage holders were being offered a discounted or adjusted rate in light of the credit crunch this year. This means that banks are doing whatever it takes to avoid helping homeowners not default on their loans. Now why would a bank not want to help someone avoid foreclosure you may ask?

The reason is actually very simple and incredibly complicated at the same time. It really boils down to whether or not you include compassion in your decision making or if you look strictly at historical evidence. Compassion says help these people out by adjusting their mortgages for more affordable terms and thus allow them to avoid foreclosure. Historical evidence says that when banks and the government bail out people in bad loans with inflated real estate prices two things will always happen: inflation will rise dramatically and housing prices will drop quite a bit. Either way housing prices are going to plummet and they already are. However, by bailing these borrowers out, you help keep incredibly inflated housing bubble prices higher thus allowing the bubble to grow even larger.

This 20 yr bubble MUST burst. You can’t bail out borrowers and keep inflated prices high so that 2-5-10 years from now when we run into the same problem, the bubble will be considerably larger then it is today. In a scenario like that, you truly face a Great Depression like recession in the markets. The bubble needs to be deflated, and sadly the only way housing prices will come down to the level they need to be at, requires a lot of people to lose their homes.

Its a dirty and disgusting truth, but people losing their homes (2 million is the current estimate by early 2009) is the only realistic, responsible, and logical solution to the housing bubble and credit crunch. The market must be realigned with real income, real inflation, and real economic growth rates.