Caslon8000 said"...it turns out the abyss is deeper than most people think because there is a second mortgage shock heading for the economy."
Just an idea, why don't these mortgage companies, banks, etc that gave out these bad loans run actual credit / financial /background checks on these people like they should have in the beginning (instead of just doing what they did before) and have a sliding scale model of those that can pay the new adjusted rate get the new adjusted rate get that new higher rate as was stated in their loan documents if they chose to read them.
Those that can't afford to pay the new adjusted rate keep their current rate (as long as they have been paying it on time and regularly) and are rechecked in 3 years for their time of possible readjustment.
For those who have lost their jobs there should be a moritorium(sp?) for between 6 months-1 year on payment of their mortgages (by having a smaller flat rate - think of it like when you freeze a gym membership and you still have to pay a rate to keep it active and not go into default). Now for this to work, you would obviously have to check the person's lifestyle. If he or she is living in Manhattan, and has 250k in savings in the bank (which is not at all uncommon), then he or she should still be paying their mortgage vs someone who may have been living paycheck to paycheck.
Then restructure the deals into new CMBS (Commercial Mortgage Backed Securities - pools of loans that banks bundle and sell to other investment banks to sell in the open market - generalization I realize) loans and have them rated accordingly by the ratings agencies (the ones with the best credit/financials are given AAA and so on down the line being truthful about the ones with the most risk. However this market most likely will change forever.
Right now, I would say the biggest concern should be the CDS (Credit Default Swap) market. Think of a credit default swap as insurance. If I own stock in GM, I can purchase a credit default swap to hedge myself against loses for owning stock in GM the company should it go into default (bankruptcy/restructuring) and are basically saying that I think you are a good stock to own because of the idea of risk vs reward, but I think you are too dangerous and volatile to trust you so I am going to buy a CDS to protect myself from your possible default. The CDS graphs are also considered to be the clearest window into what Wall St. really thinks about a company. The more people watch this the more people will begin to pull money out of companies like Ford, GM, the big banks, etc. For many of these firms, the spreads are off the charts.
So that's what I think - and trust me I am by no means saying that my idea is correct, but I think at this point something similar would be worth a shot.