The US Congress and the Bush administration are considering ways to prevent mortgage defaults. Attractive for humanitarian reasons, it is a second or third best option to reduce or eliminate the housing problem.

The main problem in Britain and the US is an excess supply of unsold houses. As long as the large unsold supply remains, housing prices will continue to fall. The high risk in bundles of mortgages will remain until the market believes it knows how far housing prices will fall. The reason is clear. Falling housing prices increase mortgage defaults. Anyone buying a bundle of mortgages must anticipate that part of the bundle is now worthless and, as prices fall, more will become worthless. Currently, the forward market estimates that US housing prices will fall 11 per cent in 2009, in all a decline of 33 per cent from the peak in 2005.