Uncle Sam, Foreclosure Specialist?

So, how much of the $700 billion that the federal government pours into the bailout can the taxpayers expect to recoup? The $700 billion number after all, is what the government expects to pay to buy bad loans. The hope is that there's some residual value there. Not everybody will default. Not every house will be worthless. Right. Right?

In yesterday's story for The Big Money I wondered what it means for the bailout and the economy if the credit markets are right in the dismal value that assign to the loans going bad in the credit crisis and the derivatives built on them. (If you want some interesting estimates on the total loss, you can see this paper from Goldman Sachs's Jon Hatzius—he puts total bad losses at $636 billion if home prices keep dropping, which they will.) One of the discussions going on in the econ blogs is whether the government has to overpay for the loans. Can't they just pay financial institutions what they're worth? Well, my sense is, no—or it's not much of a bailout, is it? But there are a lot of people vastly more qualified than me to have an opinion on this.

From a non-economist's standpoint, however, it seems worthwhile to point out that what shape the unwinding (is that a suitably bloodless term?) takes matters a lot. If a government takeover of troubled assets translates to restructuring mortgages actually keeping people in their homes, that is both an end in itself and I would suspect a good thing for the downward spiral of the housing market. We have to assume that the endgame of the bailout plan does not have Hank Paulson, or whoever replaces him as treasury secretary, knocking on homeowner's doors to deliver foreclosure papers. If people don't like the bailout plan now, they sure won't like it more if that happens.