> When people are forced to pay mortgages on which they
> are currently defaulting, they will have no money left
> for other spending, no?
There's a longer-term question here: how do we stop people from getting there in the first place? As housing values continue to decline, more people consider default. It's turtles all the way down. It's already the case that they should have done something a while ago when the problem was smaller, but his point is to stop the decline.
So it's not so much how to get the people who are already in default to spend again; it's more about how to keep it from getting worse. The trend is that as housing values drop, people feel less comfortable with their spending and get defensive. The impact is not just on those underwater; it's on everyone who owns a house! That's a much bigger number.
> One can also argue that defaulting on mortgage frees up
> resources for consumer spending. Am I missing anything?
Yes: if 5% default, that frees up 5% of some value-weighted-average-insert-math-here; it also depresses the other 95%'s spending, likely by more than is gained by having the 5% default.
Anyway, I think it's a dumb idea; my idea posted here last week is better :-)
/jordan