How I would have fixed the mortgage crisis

As I was sending off information to the Department of Justice to be included as part of a settlement, where Countrywide (who’s loans are now owned by Bank of America) has to make some reparations because of discriminatory practices against African-Americans and Hispanics, I began to think of how I would have dealt with the mortgage crisis. My simple solution is to let bad businesses go out of business.

What happened in real life is Countrywide made bad loans. Then the government forced Bank of America to buy Countrywide. Now Bank of America has a bunch of bad loans and foreclosed homes. Meanwhile, those people who had loans they could afford are stuck in houses that are not worth the amount of the loan. These people go to Bank of America to try and get a loan modification, and they are refused because lowering these people’s interest rates and/or forgiving part of their loan will make the bank even less profitable, and the institution could end up in the same position as Countrywide was in.

Here’s what I would have done. Countrywide makes bad loans, so they go out of business. Now everyone who had a home loan from Countrywide owns their home, free and clear, as their creditor is essentially dead with no heirs. The result for the people is that home prices don’t drop so much because their aren’t as many foreclosures and short sales on the market. They also have the money they were paying in monthly mortgage payments to put into savings, spend, or invest, stimulating the economy. Tax revenue also goes up, as these people now have a one time increased income, the amount of their loan forgiveness, and they no longer have the mortgage interest deduction. That first tax year would be a big hit for many, but most should have the money to pay since they no longer have a house payment. House ownership is up. Personal debt is down. The economy is stimulated. Tax revenue is up. Government debt was not increased by bailing a company out. Bank of America doesn’t get stuck with someone else’s bad loans.

Am I missing something? I’m just a seminary student trying to make his way through life, but this just makes sense to me.