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Recently Newsweek*, claimed that Former Treasury Secretary Paulson thought it was “too hard” to put a pricetag on bank’s bad loans.  So instead of focusing the bailout upon the bad loans, he gave the money to the banks who in turn were reluctant to loan money because they still had lots of those bad loans.

The first part of TARP was of little help to our economy. I think that was because Paulson gave the money to the same people who led us into this mess. We need to focus first on “bad” home loans. If we wish to improve, we need to set a price on those “bad loans” (which were bad mostly due to poor bank management, not bad homeowners). I suggest we set that new price and insist that it is the real value of the home.

I disagree with Paulson. I think it is not that tough to put a pricetag on “bad loans” – at least in the real-estate market. A good friend and excellent analyst once told me that he always wanted to be the first to establish a number, because everyone else would need to accept it or justify a different number. The problem is not math, it is leadership. A home is valued at exactly what will be paid for it – that is the theory appraisers have been using for many years. They call this approach “market value”. When appraising a house, they look at what people have paid for similar houses for the past year. I guess they judge that if some folks paid an average of $180,000 for houses with similar features and location, then new buyers will pay the same for the comparison house.

So, using the best number theory, let us look at what people have paid.

According to the National Association of Realtors, the average home price in the United States appreciated -15.78% between December 2007 and December 2008. So, if a house was valued at $100,000 in 2007, it is now valued at $84,220, while a house valued at $350,000 is now worth $294,770.

Since this is a national average, it could be applied to all loans in the US, or Treasury could use regional numbers, which are also available. The math is the same. This is, as they say, not rocket science. I hope the new Treasury Secretary is better at math, and much better at leadership.