Via Greg Mankiw's Economics Blog, Luigi Zingales has a Plan B to the Poulson (plan a) that seems to be failing. Interesting summary of the basics of a homeowners' dilema:

Rescuing Main Street
Suppose that you bought a house in California in 2006. You paid $400,000 with only 5% down. Unfortunately, during the last two years the value of your house dropped by 30%; thus, you now find yourself with a mortgage worth $380,000 and a house worth 280,000. Even if you can afford your monthly payment (and you probably cannot), why should you struggle to pay the mortgage when walking away will save you $100,000 more than most people can save in a lifetime?

However, when the homeowner walks away, the mortgage holder does not recover $280,000. The foreclosure process takes some time during which the house is not properly maintained and further deteriorates in value. The recovery rate in standard mortgage foreclosures (which will not take place in the middle of the worst crisis since the Great Depression) is 50 cents per dollar of the mortgage.

I'm no economist, but he seemed to understand the issues, far more than Britain's Badger & McTwat. His proposals are two fold.

• Provide re-contracting legislation where the homeowner can remorgage but give up some equity on sale of the property.
• Provide pre-packaged bankruptcy, wiping out the existing equityholders and creating equity from the existing debt.

 
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