I don't see that adjusting rates in bubble markets will do much good. People making $80K bought $750K houses. No adjustment in interest rates will help. The mortgage would need to be cut down to $250K, but that would mean the mortgage holder takes a $500K loss.
Maybe in cases where people can really afford their houses but they were given ARMs when they should have been given fixed rates, adjustment will help. But in many cases ARMs with teaser rates were being given out so people could buy a lot more than they could afford. Adjustment will lead to huge losses across the industry. It is likely that currently a large number of banks are insolvent--even without any adjustments.
This whole thing is a giant clusterfuck. It looks like everything is overvalued, starting with the houses and extending to the creative finance products that were made out of the mortgages. It is a giant inverted pyramid that has its apex balanced on housing prices, which are now crumbling. I cannot help but think that trillions of dollars of phantom value have been created, and there is no solution other than trying to control the collapse so it does as little collateral damage as possible.
I have nihilistic thoughts that a lot of derivatives should be declared null and void. Tens of trillions of value would go up in smoke, but that value is not real anyway. It should be recognized as bogus. Credit default swaps essentially amount to selling insurance without a license and without the usual regulations that ensure the policy writer will be able to pay the claims. Void everything and let the chips fall where they may.