If we all agree on a few preliminary assumptions:
That our goal should be to minimize the government’s costs, to hit the bottom of the market sooner rather than later, and to punish the irresponsible lenders, and…
That the government’s actions so far, and into the future, promise to be wasteful, reward the wrong people and lenders (such as by buying underwater mortgages at face value), and take too long, and…
That the possibility exists for the RE decline to feed upon itself, forcing the bottom to be below trend line or “fair value” historically and putting underwater many people who now have 10% to 30% equity in their homes, thus doubling or tripling the taxpayer’s costs, then
this approach merits a closer look.
It gets ahead of the curve (assuming it could be implemented quickly, which I think is its biggest problem), and at a lot lower costs. It only keeps the borrower in the house if they have the liklihood of paying the new, lower mortgage. Yeah, I’d also like to not reward those who can stay with a lower principal, but the current and future programs are going to shower the undeserving FBs with a lot more than this program would at much greater cost to us.
As to the “social costs”, I’m not including solely the disruption to the family that is forced to move, but the external costs imposed on the neighborhood, the erosion of the property tax base and resulting hikes in other taxes, the overshooting of the price decline, and the inherent waste of perfectly good houses boarded up for many months or years.
