Face Value

The other day on Charlie Rose several economists discussing the economic crisis seemed to agree: the only way out of the housing crisis is to lower the face value of a high percentage of the bad loans. For instance, someone borrows 500,000 that they can never pay back, somehow the loan will need to be restructured to 300,000 or whatever amount the person can reasonably expect to pay. (point is - it isn't just about reworking the monthly rates). They all seemed to agree there was simply no other option.

What I don't understand is who eats the 200,000 difference? And do these people get full equity? It is all confusing to me...because I look around and it's not like homes that were selling for 800,000 are suddenly worth 400,000. At least not around Los Angeles or San Francisco, the only places I pay attention to home prices. And yet, people are routinely losing over 50% of their stock portfolio or 401ks. Why do we bail out the homeowners and keep the real estate prices artificially high? I just find the whole thing confusing....I suppose I understand that massive numbers of foreclosures create compounding societal problems, but these massive foreclosures must be occurring in very specific locations (because from what I read, it isn't happening in a large number of states and I certainly don't see it in prime real estate areas). If this is the case, it seems to me, the foreclosure problems are LOCAL problems and can be dealt with by a mix of temporary financial assistance to specific local real estate markets (to stem foreclosures and the compounding problems - crime, homelessness, etc) combined with Federally sponsored work programs in those areas (or incentives to businesses to open up offices in depressed real estate areas, etc) to assist with the job markets in those local areas. Shit - just in my business - give incentives to a movie or TV production to move to Detroit or Phoenix or Vegas and they could help give a nice little boost to the economy - all the food, hotel, office workers, actors, etc.

But broad, nationwide bailouts of overleveraged homeowners doesn't seem fair or useful. Let the houses get dumped on the market and people with good credit buy for what they're worth. What's wrong with that?