Last week, the government revealed a contingency plan that could help keep Fannie Mae and Freddie Mac, the two biggest buyers of home mortgage loans (and government chartered banks) afloat should things get dire. But an interesting alternative solution is being suggested by BloggingStocks, based on which home mortgage loans are likely to be good, and which are likely to be bad:

If we analyze that split, we may be able to lower the cost of bailing
them out by putting the good assets in a "good bank" and the bad assets
in a "bad bank." Shareholders would probably be happy to buy stock in
the good bank. And owners of the bad bank could either write off their
holdings or seek to refinance them. Similarly, the holders of
mortgage-backed securities (MBSs) around the world would no doubt be
delighted to know what proportion of their MBSs are good and what
proportion are bad.

This is an intriguing idea. It would, of course, result in some losses for those holding mortgages sent to the bad bank. But, on the other hand, it would be a way to separate the bad from the good, and move on after cutting losses and forcing investors to deal with the consequences of their bad decisions. (Remember when the tech bubble burst? No one was willing to have the government bail out those overly enthusiastic investors.)

Do you think mortgage back securities should be divided up into "good" and "bad"?