You sound like you are trying to avoid placing the blame on the bad loans, where the blame truly belongs.
First of all, what experience did ANYONE have in the area of insurance on sub prime mortgages? The answer, of course, is that there is NO actuarial experience. Congress CREATED this risk, and then the financial services industry tried to come up with ways to DEAL with the risk. Hard to do, compared to corporate and municipal debt, since individual credit ratings are protected, confidential, private information.
Next, it was originally thought, by the government, that we would set up a “toxic bank” of some sort to absorb the bad debt. Very hard to do, since the bad debt is now diversified with the good debt. We do not know how to tell the loans apart until the defaults pop up.
Tell me: What practical difference is there, in the END RESULT, between the government “buying up” the bad debt, or the government simply funding the mortgage insurance on that debt?
It would be dumb for the government to buy up bad debt, directly, if there was insurance on that debt. This, of course, was the original plan but that plan made little sense, when the insurance issue was raised.
Just because there is a risk created by government policies does not mean that an insurance company must write policies for that risk. Indeed, basic underwriting principles hold that a lack of knowledge about a risk requires that a company not write a policies to cover it.
As it happens, there was head scratching in the European financial press when AIG wrote insurance for mortgage CDOs. Why would they do it? The crew that wrote the insurance was being lavishly paid and generated fat premiums. They wrecked AIG, leaving the US taxpayer to pay the bill and pay for extravagant bonuses to those responsible.