The rate of foreclosures continues to accelerate. That generally means that banks are dumping them as fast as they can. Banks don’t want to own houses. And, why should they? The value of the asset class is still falling.
The federal government is probably going about trying to steady the economy in the wrong way. Tax rebates last a month or two. Money from the Fed goes onto bank balance sheets, but it is not being passed to consumers and businesses in the form of lower-priced lending.
The Wall Street Journal makes the fairly obvious point that "Stuck with a growing glut of foreclosed houses, banks and investors are shedding them at increasingly steep losses, potentially adding to the banking industry’s red ink this year."
The problem is not being attacked at the right place.
Aid to banks and consumers is a very indirect means of stanching the bleeding. If the government is going to spending several hundred billion dollars on pushing money into the economy, it might as well do it where it will have the greatest effect.
There is no reason that the government cannot underwrite the prices that banks get for selling foreclosed home inventory. A credit 10% above the value of the home when it is sold would at least build a floor under the losses banks take. That, in turn, would put a floor under the prices of mortgage-backed securities.
The debate over whether the government should put a heavy hand on the present economic troubles has already been answered by the size of the checks it has written. They are simply being sent to the wrong addresses.
Douglas A. McIntyre
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