Obama Seeks Innovation To Prevent Foreclosure In Key States

President Obama will announce a new initiative today in Las Vegas to assist struggling homeowners in five of the states hit hardest by the collapse of the real estate market. He'll do so by providing up to $1.5 billion in funding for programs that those states think up independently, so long as the Treasury approves. The intention is that these states can develop good ideas to address the regional challenges in preventing foreclosure. The initiative has some pros and cons, but overall it's a pretty interesting idea.

First, a little more detail. That $1.5 billion will come from the bank bailout (TARP) slush fund. So Obama doesn't need anyone's permission to use it. Of course, this also means that it will add to the deficit. And there's the first con.

Second, the funds will only be available to five states: Nevada, California, Arizona, Michigan and Florida. They're the usual suspects when we talk about how bad the housing market is. Real estate's collapse was widespread, but it was far more severe in these five states. Their home prices declined by more than 20% from their peak. As a result, it probably makes sense to focus on these few, though the other 45 probably wouldn't have minded a piece of the $1.5 billion pie.

But, really, targeting who gets this assistance makes a lot of sense. Yesterday, I mentioned that one of the problems with the home buyers credit is that many homeowners who would have bought a home anyway still get the government money. That causes needless government spending. By targeting the worst-hit states, the unintended beneficiary problem will be less severe, though it's impossible to eliminate entirely.

I also like the idea that state governments will essentially have to "earn" this month by coming up with innovative ways to prevent foreclosures. As I've said in the past, the Treasury's Home Affordable Modification Program isn't reaching as many struggling homeowners as anticipated. The administration must see this new initiative as a way to reach even more.

So what will these states come up with? Principal reductions? Payment deferrals for the unemployed? Home to rental conversions? Presumably anything goes -- so long as the Obama administration approves. That's also a pretty smart move politically, because it could allow for some of these states to institute more controversial measures. If such programs aren't instituted nationwide, then they should have only a minor place in national headlines.

Overall, this new initiative is a fascinating strategy. It's a pretty savvy move on the part of the Obama administration, as it targets the worst hit states, gives them flexibility and likely minimizes political fallout that would result from a new nationwide program. I'll be curious to see what the states come up with.