Damning with faint praise

Megan McArdle Feb 19 2009, 12:26 PM ET

Felix Salmon on the housing bailout:

I have to say I like the look of Obama's housing-bailout plan. It's quite elegant, and makes full use of the fact that Fannie and Freddie are now owned by the US government -- which means they can be forced to offer 105% loan-to-value mortgages even when the borrower isn't creditworthy at all.

Obviously, all of this comes at a cost to the US government: the figures being bandied around today range from $75 billion in the NYT to $275 billion at Bloomberg. But really nobody has a clue how much it will cost: that's entirely dependent on whether or not the plan succeeds in arresting the fall of house prices.

I especially like the idea of offering loan servicers $500 if they modify a loan before it becomes delinquent, especially if it's accompanied by an easy and streamlined mechanism for getting such modification requests into the Fannie and Freddie systems.

This plan isn't designed to directly help borrowers who are massively underwater: if your first mortgage is more than 105% of the value of your house, you're ineligible. That will help reduce some of the costs to the government, and move them over to the lenders, who now look as though they will be bailed in to bankruptcy proceedings -- a long-overdue development.

Incidentally, this plan is certain to increase the astonishingly high delinquency rates on non-agency mortgages, since it's basically designed to take most of the remotely viable non-agency mortgages and refinance them into agency mortgages, leaving only the complete and utter nuclear waste behind.

So the plan:

1. Forces the bloated and undercapitalized mortgage agencies to take on more debt without regard to creditworthiness

2. Cleans up only the least toxic loans

3. Will cost some unknowably huge amount of money

This is from a supporter.

My lunatic proposal for the day: why not make it easier to move homeowners out of homes they can't afford? Set up a streamlined foreclosure proceeding where a current or mildly delinquent homeowner can simply give the house to the bank and walk away. Do this with two legal provisos:

1. No tax on the forgiven loan

2. No black mark on the credit record. The bank marks the loan as fully satisfied.

The homeowner gets a fresh start, and the bank gets the house without the huge administrative costs that are normally associated with foreclosure. Everyone loses something, but no one loses a crippling amount, and there is no net transfer between two parties who are both in financial trouble.