I hope you are correct, but let me express why I am not 100% certain that your prediction (that market forces will win out) will come true.
The reason all the pols are scrambling to liberalize the rules on mortgages and mortgage securities for FNMA, Freddie Mac, FHA, OFHEO, FASB, SEC, the Fed, etc. is to keep home prices as high as possible. So if partial measures are seen not to be working as well as they’d like, they’ll move on to stronger measures.
For example, if raising the conforming limits doesn’t work because the underwriting is too tight to allow home prices to stay high, then they will loosen the underwriting criteria. Investors buying the mortgages won’t do anything to stop this because they know payments on the loans are guaranteed by taxpayers, so it makes little difference to them if FNMA/Freddie mortgages go bust or not.
If ARM resets become too painful in the free market, then short-term interest rates will be lowered, and govt-backed guarantees for re-fis will be expanded until the pressure on prices is lowered.
Most voters will be OK with a 5-10% rollback in prices as necessary medicine, but beyond that voters will push their pols to take stronger and stronger measures. Price declines beyond that could happen, but as they do they will meet ever fiercer resistance.
I am not saying a large price decline is impossible. Ultimately even the strongest counter-measures could yet be overwhelmed. It’s not an exact science, so all these measures could be overcome by market panic or sharp recession or a severe dollar collapse or something else. And the battle may become protracted, with declines dribbling in and becoming large only after many years. But it’s not all decided and inevitable.
