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No problem. They'll just walk away from the loans and let the banks (or Fannie Mae or Freddie Mac) take the hit.

And guess who ends up paying for that?

Be aware that in many places a debtor cannot walk away scott free from a loan. In Texas for example the borrower is liable even if the home does not cover the outstanding debt. (This happened to me. I went to California and asked a lawyer what would happen and was told that the law in CA cooperates with the law in TX and would help the TX courts atach other assets to settle the debt. The loan agencies you mentioned are not liable for the debt, they help transfer the loan in the secondary loan market, but the only one responsible for the debt is the borrower.

Now in California where the home CAN be surrendered for the debt the lender takes the hit, again not the taxpayers.

Be aware that in many places a debtor cannot walk away scott free from a loan. In Texas for example the borrower is liable even if the home does not cover the outstanding debt. (This happened to me. I went to California and asked a lawyer what would happen and was told that the law in CA cooperates with the law in TX and would help the TX courts atach other assets to settle the debt. The loan agencies you mentioned are not liable for the debt, they help transfer the loan in the secondary loan market, but the only one responsible for the debt is the borrower.

Now in California where the home CAN be surrendered for the debt the lender takes the hit, again not the taxpayers.

Not only that, but for borrowers that do default and leave the lender holding the bag, the IRS gets involved. Say someone borrows $400k for a home, then defaults and the lender is able to sell it but only gets $300k because of a deflated bubble. The IRS will count that as $100k of income to the defaulter, and they will have to pay income tax on that amount. Bankruptcy won't help, because IRS debts are not forgiven in someone declares bankruptcy.

The load agencies I mentioned are currently under scrutiny for padding their portfolios w/ various loans (aka cherry picking) to bolster their bottom line. Leaving aside any argument about whether a quasi gvt body should be in the mortgage business to make a profit, this obviously means they carry some loans on their books.

In the event of a massive default, like I said, "guess who'll pay?" Its not really that there's a hard and fast requirement for the gvt to step in, but in practice they'd have to given the size and scope of the debacle.

Secondly, re the banks eating the cost: Hearken back if you will to the S&L crisis of the 80's. Who picked up that tab?

Need I say more?