Who gets the foreclosure bail-out money?

NYTimes.com has a story on the tough choices ahead to figure out how to disperse homeowner relief in Arizona. Here’s the story: Microcosm of the Housing Crisis on an Arizona Street

I am trying to be convinced that foreclosure relief is a good idea. I have enormous respect for the real estate economists in my school, and in general, they support foreclosure relief based on the externality argument: ie, that foreclosures cause home values to fall in the neighborhood, and thus are an externality. There is some empirical work out there measuring the externality, but I am often unconvinced by externality arguments that don’t actually involve physical environmental problems. External costs and benefits get bandied around too often in the public sphere as code for “this is something I want/don’t want, so it will benefit/cost everybody” instead of really reflecting the downstream phenomenon the concept should.

Here’s why I can’t get on board.

1. People tell me that the reason I shouldn’t fret about poor people is that housing filters down to them as houses age and prices fall. But if we are keeping people in their houses and making housing a can’t-lose investment, which will increase or at least stabilize house prices, how does that filtering happen?

2. Nobody was complaining about externalities when their neighbor’s inappropriately high housing sale value was inflating their own home prices. Is this really a market failure, or is this just a painful reversal of neighborhood effects?

3. How is it that we are in housing crisis now but not when housing prices were higher?

It seems to me that the means test for justice here is that we can and should help out struggling homeowners, but that the program should be more like guaranteed student loans than operating subsidies to households. I mean, hell, Section 8 housing doesn’t get this kind of love. The government ponies up the money to help out the owner and keep them in their house, but that money has to be paid back. Just like student loans, you can apply for a forbearance on the repayment if you remain unemployed or fall ill. But it’s to be at a subsidized rate after a certain amount of time.

Why isn’t that enough?

The one place I don’t see such a plan working is for elder housing. There I can see a rationale for a straight compensation.