True. However, it's only a portion of these ARMs that are affected. Furthermore, the losses are greater if these homes are all foreclosed at the same time and forced to be sold in a down market.
Any house forced out of weak hands and sold for a low price, eventually gets owned by somebody. The real value of the house does not change. The return to a future buyer goes down in exact proportion to that of any existing deadbeat owner or his banker's, going up. That part is a straight wealth transfer from future buyers to current owners.
The only net economic impact comes from the secondary incentives set up. Here, they are all bad - make loans at high rates to poor credits, ignore default risks, ignore rational house prices, make more houses if they cost less than X in labor and parts, invest in real estate transactions infrastructure, keep available credit supporting make believe house prices instead of loans to small businesses, wire the financial system to shovel newly created money to politically preferred forms of collateral not the highest returns or objectively safe investment, etc.
It is a typical bailout of losers, and economically a typical bit of short-term, panicky Keynesianism.
Re: “giving the market time to stabilize” it’s not going to stabilize simply by pushing out the day of reckoning. Given Washington’s history on financial matters (SS, Medicare, etc), it’s not surprising that this was their first instinct.
It’s a great deal if you have a 1% teaser rate extended for a couple more years; in the meantime since no one can buy your house anymore at the inflated price you paid, you’re stuck. Investors have an asset that instead of being cash flow positive is now cash flow negative, giving it a value of zero instead of 20 cents on the dollar. In five years, you’ll blow up because your even larger negative equity situation (since many of these are negams) prevents you from refinancing.
This plan is absolutely short-sighted.