A recent 60 minutes segment highlighted the peculiar situation in  Cleveland where perfectly good homes have been abandoned and are being bulldozed by the county. To preserve and protect its tax base the county has begun to bulldoze these abandoned homes. One in four mortgages in America are under water. Most are what they call “non recourse” loans where people can hand over the keys to the bank without being liable. Foreclosures rates have hit record levels due to the high rates of unemployment and depressed property values.
 
The Banks are foreclosing and evicting tenants, but to avoid paying the property tax and maintenance costs of the properties the banks are not taking possession of the properties after they have the owners evicted. As a result these homes often become targets for looters, get stripped down and become dilapidated. Abandoned homes thus become blight to their neighborhoods a  negative externality in the parlance of economics. The consequences and benefits (in this case negative) of a transaction between a homeowner and a bank have spillover effects to people who have nothing to do with the transaction.
 
By aggressively evicting tenants and foreclosing, the banks are actually depressing real estate of people who are not their customers. A county official suggested that it might be in the banks interest to lay off evictions so as to not further drive down real estate prices. The movie Margin Call shows why it may be in the competitive interest (Game theory maybe a Nash Equilibrium) to try and be the first to sell off the shoddy assets.
 
The banks would argue that any kind of leniency or accommodation might lead to moral hazard and set legal precedents. Of course this logic applied when the banks and the entire financial system was at risk due in most part because of overaggressive risk taking by financial institutions.
 
This latest chapter of the housing bubble highlights the importance of market design, a key point that is often unemphasized/overlooked in economic analysis.

 Markets do not exist naturally in nature.  In order for markets to be effective and efficient they must be designed properly. Some markets require more regulation than others. We see this at a micro level with the mortgage market and as well as at a national level with the Eurozone (and someday in the next couple of  years we will see it with China).