If you put capital into a bad bank, it is still a bad bank unless you are certain that the capital is enough to absorb all prospective losses on mortgage-related securities.

The Fed and Treasury might, therefore, focus more on stabilizing these assets by making 10-year, interest-only, low-interest-rate (for example, 3%) mortgages to homeowners in amounts equal to, say, 85% of their existing mortgages, the proceeds of which would fully satisfy their existing mortgages.

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