Let housing find its clearing price-James Saft

While the maths often cited is that a repossession and sale can cost a lender 50 percent of the value of the loan, that rather attractive number hides the fact that modifying loans successfully is just very difficult.

Data from the Office of the Comptroller of the Currency shows that more than 53 percent of loans modified in the first quarter of 2008 had re-defaulted again within six months. Nearly 36 percent went bad within just three months. And this was when the U.S. economy was in better shape than it is today and unemployment lower.

Now it may be that those modifications were given to the wrong people and under the wrong terms, and it may also be that the new plan makes that all right. But I doubt it.

LET'S FIND A CLEARING PRICE

The Mortgage Bankers Association did a study in 2008 here that found 70 percent of foreclosures were on properties either not occupied by owners, were on borrowers who could not be found or did not respond, or on borrowers who had already had a modification and were defaulting again. Of the 30 percent not in those categories must surely be quite a few of tomorrow's re-defaulters!

The housing rescue plan is in part an attempt to rescue banks, whose balance sheets will be further undermined by falls in house prices and defaults causing many more failures. The bottom line is that many Americans who now have mortgages would be better off renting.

American consumer balance sheets are incredibly stretched. The average American has perhaps 30 percent of equity in his house, but that hides the people who own outright, thus leaving a huge rump, especially at the bottom end, who have very high loans-to-value. About 28 percent of mortgage borrowers now owe more than the value of the house, according to Zelman & Associates. And with stocks down 45-50 percent their assets have shrunk more alarmingly, leaving them less good risks.

There is an absolutely credible argument that many Americans, particularly less well off ones, would be better off out of home ownership entirely. They would rid themselves of the yoke of a mortgage on an asset which, even after a principal write down, may not end up being a good investment.

"They are going to try and keep you in a home that arguably you don't want to be in. You might be able to go up the street and rent for half the price," said Ivy Zelman, a housing analyst who was early in identifying the issues.