1. CW doesn’t care about moral hazard in the generic sense. They are trying to survive. They could implement this program and STILL not survive, but moral hazard is not something they’re concerned with right now. They’re just trying to figure out a way to maybe, just maybe, live to fight another day.
(The larger issue is that they will come under pressure from other, more creditworthy borrowers to get better terms and conditions for their mortgages as well. Don’t get me wrong, this strategy would lead to a HUGE mess, but it might be a smaller mess than just “letting the market work,” so to speak.)
2. Forget about “qualifying,” “credit,” etc. These would be irrelevant. The only question in this situation would be, “How can we structure a mortgage that these people can (perhaps) repay?” If CW goes down this road it will be about survival, plain and simple, in the generic sense, not about optimizing the terms and conditions of each individual loan.
Now I’m going to say this again – this will still lead to a messy bloodbath, but it is probably better than just simply foreclosing on everyone and letting the market decimate all concerned. It’s hard to imagine, however, that CW’s balance sheet would survive this strategy.
