Mortgages: Will Paulson's Plan Fix the Mess?

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“But they’ve also announced raising limits on Federal Housing Authority loans [which makes it easier for them], so it’s hard to determine the impact until they give you specific guidelines.”

Rather than abstract regulations, analysts put more stock in the practical solutions being proposed by Congress and others with the aim of keeping homeowners in their homes to avoid any further stress on the mortgage market.

Bove said he believes Rep. Barney Frank (D-Mass.) is on the right track by proposing that the government set aside $15 billion to $20 billion to purchase whole loan mortgages from banks off their balance sheets and have those loans held temporarily by agencies such as the FHA. That would allow the government to refinance the borrower into a fixed-rate FHA loan or something similar.

“If you want to resolve this issue, you need to keep people in their houses, which you can’t do by giving them a rule,” Bove said.

Despite Congressman Frank’s best efforts to figure out a way to provide a bailout that doesn’t cost the government a load of money, Bove said he doesn’t see any way to avoid that.

Frank’s is one of a handful of proposals for dealing with the crisis. The plan introduced by Senator Christopher Dodd (D-Conn.), chairman of the Senate Banking Committee, resembles a program used during the Great Depression that allows for a government facility to buy loans from banks once their value has been written down to an FHA qualifying level, and, in return, issuing a government-insured bond that would correspond to the home’s appraised value.

Aggressive actions by the Federal Reserve to inject much-needed liquidity into the banking system, such as creating a new Term Securities Lending Facility and expanding a term auction facility, have at least been perceived by the market as providing some relief.

But these are at best short-term solutions that don’t really match the long-term nature of home mortgages, says Gordon at Portales Partners.

“We have to create more permanent demand for mortgages,” he said. Fannie Mae (FNM) and Freddie Mac (FRE) are pushing for the Office of Federal Housing Enterprise Oversight to lift their 30% capital surplus requirements, which would free up nearly $10 billion for each government-sponsored enterprise.

Technically, Fannie and Freddie could leverage that by 40 to one but even if they were to leverage it at a much more conservative 20 to one, it would give them access to $360 billion in buying power for mortgages, Gordon says.

Making some accounting adjustments would also be a more practical solution in that it would help banks free up some capital from their balance sheets tat could be used for lending.

“It would allow them to grow, to actually invest, as opposed to just renting something for 28 days” as under the Fed’s expanded TAF, he says.

Bogoslaw is a reporter for BusinessWeek's Investing channel .