BTW, this is basically what happend to AIG: because of the appearance of losses in their CDS portfolio, their entire business model -- borrowing at AAA rates, insuring losses that don't cost as much as the spread between finance and premiums -- was put at risk of no longer working. Because of the true risk that emerged, they lost their AAA rating and their borrowing costs went up. The Maiden Lane vehicles essentially replaced hungry, worried banks as their lenders (whose ongoing costs were likely to skyrocket, sending AIG into a death spiral) with the Fed who took the long view and gave them the breathing room to dig their way out. And it seems to have worked.
At the time people said: what is the Fed doing paying face value for these things? And the answer is: it's the only way to get the original lender (in AIG's case, Goldman principally) completely out of the picture. Take your money back, now go away.
This almost exactly describes people who bought houses in 2007: because they are deeply underwater, the liklihood of them refinancing at 4% (which is what the people with great credit can get today) is near zero. Which means they'll never dig their way out, and it's turtles all the way down.
I do not see a reason why a Maiden Lane-type SPV couldn't be established for owner-occupied single-family houses purchased between two dates to be determined later. It's probably just a question of scale of paperwork: the bailouts were a lot of work, but it was a few thousand (at most; perhaps even a few hundred) transactions. You'd need to do between 5-7M of what I'm talking about to put a big enough dent in things, and that might just not be feasible.
There was a lot of talk early on about doing this kind of thing *at the MBS end* and it was quickly dismissed as being impractical because of the slice/dice issue; but if you did it at the level of individual mortgages, the banks would have to figure out how to deal with the rush of repayments, but they already have to do that anyway. the orderly wind-down of MBS *from the mortgage side* is just a question of accounting.
My earlier idea was that the Federal government could do something like actually forgive or at least suspend some part of the face value of the loan, but I now believe that just the lowering of the interest rate would enable millions to dig themselves out.
/jordan