“Bad Bank for Bad Debts”

Obama's team said it was considering setting up a government-run bank, or possibly banks, to acquire bad assets clogging the financial system and which are blocking new lending.

U.S. foreclosure filings up 225% compared with 2006. A total of 861,664 families lost their homes to last year, according to RealtyTrac, which released its year-end report. There were more than 3.1 million foreclosure filings issued during 2008, which means that one of every 54 households received a notice last year. "Clearly the foreclosure prevention programs implemented to date have not had any real success in slowing down this foreclosure tsunami. I don't see how we can avoid three million foreclosures again in 2009." said James Saccacio, CEO of RealtyTrac. His company now has nearly a million sales listings for bank-owned homes.

The big jump in December foreclosure activity was somewhat surprising given the moratoria enacted by both Freddie Mac and Fannie Mae, along with programs from some of the major lenders and loan servicers aimed at delaying foreclosure actions against distressed homeowners.

Foreclosures are closely tied to home prices - they tend to rise as prices fall. And nationally, home prices have fallen more than 21% from their peak. Declining prices put many homeowners "underwater" on their mortgages, owing more than their homes are worth, which makes them more likely to default. If two houses on your street go into foreclosure, you can shave 10% off the value of your house, says Mesirow Financial economist Diane Swonk.

One in 10 mortgages is either in foreclosure or delinquent on payments. That's costing the rest of us big-time: The home-equity bonfire has eliminated an easy source of credit - a heavy drag on an economy that has depended on consumer spending for 71% of GDP.

Obama wants new bankruptcy rules that would allow judges to modify some mortgages. Many Democrats also back a plan from Sheila Bair, current head of the Federal Deposit Insurance Corporation. The government would offer a deal: If the lender lowers the mortgage payment, Uncle Sam will pick up 50% of the losses if the borrower ultimately defaults. This might require a law to shield servicers from investor lawsuits. The FDIC estimates that this could stop 1.5 million foreclosures, at a cost to taxpayers of about $24 billion. This is the role of “Bad Bank for Bad Debts.”

By Katherine Marfal