Another Bailout - Government intervention makes things worse

Another government bailout to help banks disguised as help for home owners.
The basis of home loans is a loan secured by the house. If the borrower can’t pay the bank the repossess the home and given today’s house value it’s worth 20% less, eat the loss. If the banks do not want to take the loss they need to take the house, make a deal with the existing homeowner (rate), or sell the house on a short sale at today’s rates and see what they get. Why are we giving banks incentives for debt reduction?? They made record profits after a bailout that should never have happened. Whatever happened to a free market?
I’m not against helping those who have fallen on bad times but I also don’t feel warm and fuzzy about helping people who bought beyond their means or took the low intro rate ARM, who live in a bigger house or pulled dollars out of the house to take vacations or pay their credit cards off.

A little story to explain my position. When I was looking for a house Jen and I were “pre-approved” for $500K. We both said no way, their nuts. When I shopped for a loan I asked for a rate for a 30 year loan paying 20% down. I went to the local bank (WSFS) and they offered their rate no sales pitch. I also went to a few mortgage brokers who were selling what they made the most money on (ARM) and thought I was crazy for wanting to put 20% down and offered a split loan to avoid PMI. All these banks made tons in fees selling these exotic mortgages to un-credit worth / challenged Americans above and beyond what they could realisticly afford.
So let’s see if I got this correct:
Government makes a law for “Homes for All Americans” and allows banks to reduce their credit standards. (Lobbied for by the banking industry and probably real estate brokers)
Banks gladly reduce their credit requirements and offer exotic non-conventional mortgages to some who should not have gotten the loans and reap the fees and commissions.
The housing market reacts to all the “credit worthy” customers by home prices rising (supply and demand)
The Banks sell the loans to the government backed entities Fannie Mae and Freddie Mac.
The 3 and 5 yr ARMs matured and their interest rate doubles. Homeowners show surprise at the new rate and can no longer afford the payment. The housing market can’t sustain and crashes and the government and the banks are at a loss for why.
We bail out Fannie and Freddie again. We bail out the large banks but not the small local ones who also were hit “hard”. The larger banks were able to steal the smaller banks and are now worth more for their shareholders.
The banks pay the money back. Amazing how they found the money when every news channel was reporting on how they were running their business (bonus anyone?)
Now the government wants to bail out homeowners which is a guise because they are giving the money to the banks to cover the reduction, another bailout. Not all the details are out but it looks like they are going to cover the loss in value for the banks. They made billions in this whole process and we continue to give them money when they have yet to run a business better then the government.
Either way those of us who bought within our means and paid our bills are going to pay for this in taxes and when we sell our house our neighbors who sell their house get to reap all gains in value.

Let the banks eat this. If they can’t they go under and we sell them off at a Bankruptcy sale. Same as what happens if you/I or any small business goes under.