In your example, the owner of the formerly $800k place has more of a "point" to staying in that place than anyone else does, so the amount of money you'd have to apply to let them stay is less than the loss that happens if you don't, and someone else buys the place. If that place is worth $500k on the market now, the homeowner already has that extra $300k of debt burden.
Sure, but if the Owner can walk away from the debt burden, then he doesn't have it any more. If I pay $800 for a suit, and I see the suit next week marked down to $500, nothing changes - I'm already out the $800. If I promise to pay $800,000 for a house, but then find out I can have the same house for $500,000, that's $300,000 worth of incentive for me to wiggle out of my current promises.
You don't make it go away by declining to help them keep the house: one way or another, that money is gone. However, if the house is worth $500k on the market, it's likely worth more to the owner, let's pretend $600k. So if they can't afford it and someone else has to buy it, it gets sold for $500k and $100k worth of value goes *poof* - nobody gets it.
While cognitive neuroscience has some fascinating things to say about the ownership effect, I think assuming it has a 20% price value for everyone is a poor basis of policy. Likewise, If we take the case of the $800,000 mortgage, I fail to even understand what you're trying to get at. Is your argument that if I write down $200,000 of that fellow's debt, that he'll stay? In that case, I haven't saved $100,000, I've lost $200,000 - unless you're presupposing I take that money away from you and me and give it to this fellow's banker? And the last $100,000 is a non-number anyway. If the fellow can sell the house for $500,000, that's its market value, regardless of how sentimental he is about the place.
If "liquidity" were the only issue, banks could just sell the securities they have no for whatever people are willing to pay for them - there are people willing to buy them cheaply.
Oh? Whom, and how cheaply, and how much?
A plan that would obviously prevent a lot of foreclosures would give all of those securities a lot more value, which is the real problem.
That's not the problem. The problem is that most of the key players are so heavily leveraged (or were, until the fed took over the last two survivors) that there's no way to unwind their positions in those securities without bringing in a new counterparty. If it was just a matter of taking a paper loss, it'd just be a balance sheet write-off, and everybody goes about business as usual, no different from when the stock market tanks. THe difference being that stock market price discovery is almost instant, and the price discovery mechanism for these securities is being written even still.
Applying the same money directly at the financial institutions can possibly solve that same problem (though I'm skeptical), but it does so without the benefits of applying the money to the root of the problem.
Just to be clear, (because I realize there are some different implications in your previous comment) how do you propose to do that? Write down the value of existing mortgages to market? Pay them off with Federal dollars? Something else?
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Sure, but if the Owner can walk away from the debt burden, then he doesn't have it any more. If I pay $800 for a suit, and I see the suit next week marked down to $500, nothing changes - I'm already out the $800. If I promise to pay $800,000 for a house, but then find out I can have the same house for $500,000, that's $300,000 worth of incentive for me to wiggle out of my current promises.
You don't make it go away by declining to help them keep the house: one way or another, that money is gone. However, if the house is worth $500k on the market, it's likely worth more to the owner, let's pretend $600k. So if they can't afford it and someone else has to buy it, it gets sold for $500k and $100k worth of value goes *poof* - nobody gets it.
While cognitive neuroscience has some fascinating things to say about the ownership effect, I think assuming it has a 20% price value for everyone is a poor basis of policy. Likewise, If we take the case of the $800,000 mortgage, I fail to even understand what you're trying to get at. Is your argument that if I write down $200,000 of that fellow's debt, that he'll stay? In that case, I haven't saved $100,000, I've lost $200,000 - unless you're presupposing I take that money away from you and me and give it to this fellow's banker? And the last $100,000 is a non-number anyway. If the fellow can sell the house for $500,000, that's its market value, regardless of how sentimental he is about the place.
If "liquidity" were the only issue, banks could just sell the securities they have no for whatever people are willing to pay for them - there are people willing to buy them cheaply.
Oh? Whom, and how cheaply, and how much?
A plan that would obviously prevent a lot of foreclosures would give all of those securities a lot more value, which is the real problem.
That's not the problem. The problem is that most of the key players are so heavily leveraged (or were, until the fed took over the last two survivors) that there's no way to unwind their positions in those securities without bringing in a new counterparty. If it was just a matter of taking a paper loss, it'd just be a balance sheet write-off, and everybody goes about business as usual, no different from when the stock market tanks. THe difference being that stock market price discovery is almost instant, and the price discovery mechanism for these securities is being written even still.
Applying the same money directly at the financial institutions can possibly solve that same problem (though I'm skeptical), but it does so without the benefits of applying the money to the root of the problem.
Just to be clear, (because I realize there are some different implications in your previous comment) how do you propose to do that? Write down the value of existing mortgages to market? Pay them off with Federal dollars? Something else?