As we noted, the time is ripe to try new tactics to combat foreclosures, including encouraging ways to rent foreclosed homes back to former owners. Fixing tax laws that are slowing down some loan modifications might help. Even direct loans to homeowners could be a strategy.

Surowiecki agreed:

If we really want to keep people in their homes, then, nudges and renegotiations probably aren’t going to do it. We need more direct action. One option, which the banking lobby killed earlier this year, would be to allow “cramdowns”: let bankruptcy judges reduce the principal on homeowners’ mortgages. Another, even more direct option is simply to give aid to homeowners: one proposal would have the government make low-interest loans, or even grants, to people who have suffered a steep decline in income and have negative equity in their homes. That would target the aid at the people who need it most: as another Boston Fed paper shows, defaults are most likely to happen not just because interest payments are set too high but because of income shocks (usually after the loss of a job) and plummeting house prices.

Surowiecki pointed out, as we did, that forceful actions to help homeowners might not be popular; no one wants to pay off their neighbor’s mortgage. But as foreclosures continue, the spillover effects on surrounding neighborhoods will become more severe, which may change that attitude.

But in the end, Sur0wiecki says, the Obama administration will have to come to a conclusion it hasn’t reached yet: Fixing the roots of the crisis is going to be costly. The government seems to be in denial on this. The current view is that “we’ll just keep muddling through with the current approach, which offers us the sense that we can get quite a lot without spending much,” Surowiecki said.

Maybe it’ll work. But the housing bubble was very expensive. It’ll be surprising if we can deal with its consequences on the cheap.

More reasons why it’s time for the government and the lending industry to quit trying to just muddle through the crisis and really rethink foreclosure strategies.

It was Sen. Charles Schumer (D-N.Y.) to broach the topic, proposing a plan that would allow struggling homeowners on the verge of losing their homes the option to rent the property at “a fair-market rate.”

“This wouldn’t cost taxpayers any money,” Schumer said. “[It] wouldn’t bail out the lenders. Homeowners would be able to say in their home even after defaulting on the mortgage, but they no longer own the home so there’s little temptation to take advantage of this program unless all efforts at reworking the mortgage had failed … A year or two later, maybe the value goes back up and you don’t even need to foreclose on it.”

For the banks, Schumer added, it’s a good deal as well. They wouldn’t have to go through the hassles associated with maintaining an empty house. And the rent, though less than the prior mortgage payment, would be better than nothing. “[Accepting] a fair rent will be less expensive to the bank than foreclosing,” Schumer said.

White House officials appeared receptive. Herbert Allison, the Treasury Department’s assistant secretary for financial stability, said “it’s certainly an idea that we’re thinking about.”

William Apgar, senior mortgage advisor for the Department of Housing and Urban Development, warned of one obstacle: Some homeowners, he said, are surprisingly unwilling to rent the house they just defaulted on. Still, Apgar conceded that, “If you could figure out a fair rent, it seems like it would be a fair deal.”

Schumer had an easy response to that. “It doesn’t seem to me to be too hard,” he said, “to figure out a fair rent.”

Both ideas are interesting, if not outright promising. And as TWI reported on Monday, the time may be ripe for a shift in strategy in the housing crisis, which is only getting worse despite previous government efforts to curb foreclosures, such as loan modifications.

Reuters had only a few details of how the new ideas, which seem very much like trial balloons, might work.

First, on renting homes back:

Under one idea being discussed, delinquent homeowners would surrender ownership of their homes, but would continue to live in the property for several years, the sources told Reuters.

Officials are mulling several ideas on how to swap a homeowner’s loan for a rental lease without disrupting mortgage markets.

The government could pay mortgage service companies cash to take part in the program — or encourage lenders to sell the homes to a third party that would write rental agreements — under two scenarios under consideration.

Many non-profit agencies manage affordable properties and might be interested in partnering in such a rental program, said John Taylor, the president of the National Community Reinvestment Coalition.

On allowing unemployment homeowners loan breaks:

The (Obama Administration) official told Reuters it was reasonable for policymakers to consider options for loan forbearance — allowing borrowers to delay, defer or skip payments — that are more effective than those currently available in the private sector.

But the official said the idea, which is still evolving, was difficult from a policy perspective and carries potential hazards. It could help more people struggling with economic difficulty, but it also could create perverse incentives that distort the housing market, said the official, who did not want to speak on the record about internal administration debates.

The official said such a program would be in keeping with other measures to help workers who have lost jobs in the current recession.

At The Atlantic, Daniel Indiviglio was wary:

The logistics get ugly. How long do you allow deferrals for? If unemployment is likely to remain high for another six months, or a year, can you allow mortgage payment holidays to last that long? Maybe by perverse incentives, that source means that if the deferrals extended until employment is finally found, then people would have an incentive to remain unemployed. That’s easily remedied with a time limit, however. But then you also face the problem of just deferring many foreclosures, instead of preventing them: once that time limit expires, those homeowners might still be unemployed and unable to make payments.

Beyond the relative merits of these ideas, the bigger issue is that there’s a sense that it’s time to try some new and far more forceful tactics, even controversial ones. The New York Times today, for example, calls on the Obama administration to go forward some bold action on the economy.

Unemployment is rising. Foreclosures are surging. Lending is still constrained. So why exactly is the Obama administration waiting to act?

A stubborn lack of progress in stopping foreclosures clearly is pushing Washington to consider some stronger responses. Whatever bold action the administration might come up with will run into criticism and opposition. So be it. It’s a little late to get into philosophical discussions about the government’s correct role in propping up the economy. We no longer have the luxury of figuring out a strategy that keeps everyone happy. The time may have passed to ponder moral hazards. Foreclosures are spilling over onto everyone, and dragging the entire economy down, and not just in the short term. As housing expert Alan Mallach told TWI, we’re coming to the realization that we can’t “loan modify” our way out of this.

It’s time for the Obama administration to push forward with another strategy. Actually, as foreclosures pile up and neighborhoods suffer, it’s well past time.