Mortgage relief - but why?

Congress seems determined to show that it can do something about the housing crisis. Senate Democrats and Republicans are close to a deal that would include $100 million for counseling at-risk homeowners, tax-exempt bonds to refinance subprime mortgages, and $4 billion to buy foreclosed properties. I suppose these are worthy pursuits, but WSJ columnist Holman Jenkins has another idea: Why not just bulldoze the suckers? Use tax dollars to buy and demolish foreclosed, unoccupied or half-built houses in several markets (most certainly including the Inland Empire and parts of Central California). It's not as crazy as it seems - several cities already have programs to demolish foreclosed homes that are run down. Ben Bernanke noted in a speech that "the worst-quality units are often demolished to mitigate safety hazards and reduce supply." Jenkins writes that 15 percent of new mortgages involved no downpayment and no income documentation, which suggests that these “borrowers” will walk away no matter what promises the government offers. They "aren't walking away because of interest-rate resets or income loss, but because they don't want to throw good money after bad," he writes.

Knocking down surplus homes would be the most efficient and equitable way to spend taxpayer dollars. It can proceed experimentally. It can be turned off quickly when the need evaporates. It would not be a lesson to Americans that housing debt is not real debt and need not be repaid. It wouldn't benefit the most irresponsible lenders and borrowers at the expense of responsible ones. The housing market would still have to hit bottom, but the bottom would be higher (and sooner).

[CUT]

A lending bailout would be effective in stemming foreclosures and propping up home prices only if taxpayer money were used to put speculators' housing bets back "in the money." Yes, a few hardship cases might benefit, but a federally subsidized mortgage haircut won't bring back a job, restore a breadwinner to health or patch up a divorce – the circumstances behind many of the million or so foreclosures that take place even in a good year. Today's foreclosure panic is due largely to the anomalous factor: Lenders and borrowers who crafted a new kind of mortgage for the purpose of betting on home prices. It pays off if house prices go up and is easily walked away from, leaving bondholders with the loss, if prices fall.