Where is the floor for house prices?

In this new column for National Journal, I discuss the Fed's latest maneuvers:

If banks are too scared to lend and consumers too scared to borrow regardless of interest rates, even the most aggressive easing of monetary policy might fail to push the economy out of recession. That is why, separately from the push to lower interest rates, the Fed is struggling so hard to maintain structural confidence in the financial system -- by keeping Bear Stearns in business and by promising to give banks (and now, for the first time, many nonbanks) the assurance of access to short-term loans they are no longer willing to extend to each other.

Where does it all end? If the Fed could be granted one wish, it would be that house prices start to bottom out. That would begin to put a floor under losses on mortgage-backed securities, and help to restore banks' confidence in one another. Its biggest fear, conversely, is that house prices fall further and faster. A particular risk in that case is that many more borrowers would find they owed more than their house is worth, so that it would make sense for them to default on their mortgage. (Most mortgages are nonrecourse loans, meaning that in case of default the lender gets the house and has no further claim.) If mortgage defaults catch on in a big way, causing a flood of foreclosures and forced sales, it is hard to say where the floor for house prices might be -- and the losses for lenders could dwarf current estimates.

You can read the whole column here (the link expires at the end of the week).