Feeling Punitive Towards Banks and Bailouts

I have felt less like giving banks a bailout (because of moral hazard) and preferred letting them go under, no matter the short term effect on our economy. In my worst moments, I have thought about hauling the lot of them off to jail. Someone steals $25 and they are thrown in jail. Steal $50 billion and it's only a downpayment on the money the government will give you. I know that is an unfair simplification.

Anyway, I have been strongly in favor of no bailouts for banks and other financial institutions. As an industry, I find them incredibly irresponsible in the leverage they used to finance their profits and predatory against the poor.

For banks, let them fail. Banks have at their disposal two instruments that can help homeowners stay in their homes, and thereby keep themselves (banks) in a better financial position, but have not started to offer them until under the force of government pressure.

1. Banks can renegotiate the interest rates of the mortgages they service. If they put a customer in an ARM that has recently ballooned, allow the homeowner to refinance at a fixed rate 30 year term to reduce the monthly payments. This could be offered to all, not just to those with lots of equity in their homes.

2. If a house is worth less than the mortgage and a homeowner is tempted to walk away from the home, a bank can issue a warrant (I don't know very much about this term), where the value of the home is reduced on a temporary basis. The mortgage payments would also be reduced to take this into account. If the house returns to its previous value in a certain amount of time, the house value and mortgage payments are returned to normal. For instance, if a homeowner bought a house for $200,000 but is now worth only $150,000, the bank can reduce the value of the mortgage to $150K with the provision that if climbs back to $200K in 3 -5 years then the mortgage would be revised back to $200K.

I know that banks are responsible to shareholders and they might need shareholder approval, but options #1 and #2 seem preferable to foreclosures...especially since one foreclosure in an area has a high correlation with future foreclosures.