Should Policy Try to Reduce Foreclosures?

In 2006, Benjamin Koellmann bought a condominium in Miami Beach. By his calculation, it will be about the year 2025 before he can sell his modest home for what he paid. Or maybe 2040.

“People like me are beginning to feel like suckers,” Mr. Koellmann said. “Why not let it go in default and rent a better place for less?”

After three years of plunging real estate values, after the bailouts of the bankers and the revival of their million-dollar bonuses, after the Obama administration’s loan modification plan raised the expectations of many but satisfied only a few, a large group of distressed homeowners is wondering the same thing. ...

In a situation without precedent in the modern era, millions of Americans are in this bleak position. Whether, or how, to help them is one of the biggest questions the Obama administration confronts as it seeks a housing policy that would contribute to the economic recovery.

In my mind the crucial question is whether to help distressed homeowners, and the right answer is no:

1. these homeowners assumed the risk of buying houses; they should accept the consequences;

2. homeowners who default will acquire a bad credit rating, but they will be free of their debt burden.  Instead of putting money into an asset they may never actually own, they can start to accumulate savings.

2. foreclosing on these homeowners does not mean homeownerhip will decline; it means the houses will become available at low prices to others with limited income.  What's wrong with that?