If they didn't do the fix, bankers would not have received 10% returns on loans at nosebleed prices to deadbeats. The deadbeats would just hand them the keys to the house, and the banks would unload them. The industry rule of thumb is that anything that touches foreclosure loses 15% of its value just in transaction costs. Since the prices themselves are make-believe to the tune of another 20, 30, 50%, the paper was worth, realistically, as little as 35 cents on the dollar. The lower tranches of repackaged ones were worthless.
Instead keep people paying 4 or 5%, and they are worth more like 75 cents on the dollar.
The real losers are those who did not ride the house bubble up, and anyone trying to get a house transaction done. Nosebleed make believe prices are incompatible with transaction volume. Prices will be propped up and any adjustment slowed down - and as a result, nobody's house is going to sell for oh maybe three year or so after listing. (For 20% less, even then).
Orderly liquidation and a return to rational pricing are what was needed. Instead we get a "freeze". Which will help the banks, but leave capital grossly misallocation - and stationary.
Prices are already down because CURRENT financing standards are a lot tighter, regardless of what is done here.
All this does is extend the start rate on about 25% of the subprime ARMs in the market...if this applied to EVERY ARM then I’d share your concerns.