XBox, I can’t answer your excellent question about the legal power government has to modify private contracts. But on the subject of destroying investor appetite for future home loans, this can be mitigated in two ways:
1. For non-securitized loans made by banks, lower fed funds rate to increase overall bank profits and thereby compensate banks for the loss of future higher interest income on existing ARM loans that were supposed to reset.
2. For future securitized loans, offer (per Bernanke) government guarantees of repayment to investors on a borrower default.
