If I were King, or Pres. O and his merry men & women, I'd take a big chunk of the bailout--maybe $200-300 billion-- and do the following:
1) Purchase foreclosed homes from the banks.
2) Pay 'em fair market value, plus 10%, in exchange for a promise that they will re-lend the money over, say, the next year or so. This way they would take bad assets off their books, the banks would be re-liquefied, the money would go back into the housing market (but, theoretically, to qualified borrowers this time, at the banks' discretion);
3) Hold the houses off the market for a minimum of 3 years--with an understanding that they would be feathered back into the market so as not to create a tsunami of supply in 2012--when they would be sold by the government at the then fair market value; and
4) In the meantime, lease the houses to working families who can afford to pay the taxes and upkeep of the house.
By taking a million to two million houses off the market, we would be using market forces to stabilize the housing market. Pulling all that supply off the market, while correspondingly making mortgage money available, should stop housing prices.from continued falling--and may even give the market a little bounce. Stable prices should lead to buyers who are waiting for the bottom of the market to come back into play. It should also allow homeowners to refinance and take out equity loans to stimulate the economy.
It might also stave off more foreclosures. Once borrowers and lenders of homes "on the fence" see that the bottom isn't falling out, workouts will make more sense.
For instance, I have a client who is several months behind in her mortgage because of a job interruption, etc. Last year the house would have sold for $425,000; now it's down to $325,000 and dropping. She owes, all in, about $325,000. She could afford to reinstate the mortgage, rolling in the arrears and maybe extending the term a few years--but both she and the bank are reluctant to do it for fear that the value won't be there. But if the market leveled off? This house would probably be saved.
The other issue is this-- handing money to people who aren't paying their mortgage is unfair to those many people who struggle each month to make the payment--and it threatens future lending practices as well.
We would be providing affordable housing to people who need it now.
And, ultimately, the government would have a chance to recoup some or all of its money--and may even make a billion or two if housing prices rise again.
Anyway--that's what I'd do with our money if I had the power.