How foreclosed borrowers may make a bailout politically difficult

During holidays with my family, the conversation often turns to tales of 'how it was different' in previous generations. But in some ways, I think they're right. For example, in previous generations it probably wasn't that common to deliberately trash a home if you could no longer afford the payments and were losing it to foreclosure. Today, however, according to a story in the Wall Street Journal, up to half of all foreclosed homes show signs of deliberate abuse by previous owners showing strikingly toddler-like behavior.

So why would this make a bailout politically difficult? Because who wants to reward extortionists who are showing the damage they will cause if their financial crises aren't made right? Read on:

The stucco subdivisions of Las Vegas are caught up in the nation's foreclosure crisis. These days, bankers and mortgage companies often find that by the time they get the keys back, embittered homeowners have stripped out appliances, punched holes in walls, dumped paint on carpets and, as a parting gift, locked their pets inside to wreak further havoc. Real-estate agents estimate that about half of foreclosed properties to be sold by mortgage companies nationwide have "substantial" damage, according to a new survey by Campbell Communications, a marketing and research firm based in Washington, D.C.

The most practical way to ensure the houses are returned in decent shape, lenders and their agents say, is to pay homeowners hundreds or even thousands of dollars to put their anger in escrow and leave quietly. A ransom? A bribe? "Yeah, somewhat," says John Carver, an agent specializing in foreclosed homes for Prudential Americana Group in Las Vegas. But "you lose a house, and then you get some financial help -- it's a good thing...It's a win-win for both parties."...

Some owners just walk away peacefully. But agents say a significant number take what they can carry and take revenge on the rest.

"I'm one of the thousands of people in town in foreclosure so I'd like to get as much as possible for the items," said one recent Las Vegas online ad offering a double wall oven, dishwasher and built-in microwave, all of which, in most cases, legally belong to the bank. Rules vary by state and county, but in Las Vegas, banks typically own everything that is built into a foreclosed home.

"When you're losing your dream, and you're paying all this money to it...and you're hoping that it's going to go up, and you're going to make 100 grand like everybody else did, and it doesn't happen -- you know, people get upset," says Joe Kraemer, a broker with Century 21 Advantage Gold who deals in foreclosed homes.

The evidence of that discontent was all over the carpet when Mr. Carver, of Prudential Americana Group, first visited a foreclosed house on Perfect Parsley Street. It didn't look like the usual waste from an abandoned dog or cat. "I would say 'ferret' from the way it's all along the baseboard, the way an animal would scurry," he said recently, leafing through photos of his most-memorable vandalized properties....

Some owners just walk away peacefully. But agents say a significant number take what they can carry and take revenge on the rest.

"I'm one of the thousands of people in town in foreclosure so I'd like to get as much as possible for the items," said one recent Las Vegas online ad offering a double wall oven, dishwasher and built-in microwave, all of which, in most cases, legally belong to the bank. Rules vary by state and county, but in Las Vegas, banks typically own everything that is built into a foreclosed home.

"When you're losing your dream, and you're paying all this money to it...and you're hoping that it's going to go up, and you're going to make 100 grand like everybody else did, and it doesn't happen -- you know, people get upset," says Joe Kraemer, a broker with Century 21 Advantage Gold who deals in foreclosed homes.

The evidence of that discontent was all over the carpet when Mr. Carver, of Prudential Americana Group, first visited a foreclosed house on Perfect Parsley Street. It didn't look like the usual waste from an abandoned dog or cat. "I would say 'ferret' from the way it's all along the baseboard, the way an animal would scurry," he said recently, leafing through photos of his most-memorable vandalized properties...

Banks rarely pursue charges against destructive homeowners; it's not worth the cost and trouble. Instead, they try to prevent home rage by giving agents such as Mr. Carver blanket authorization to offer at least $300 to occupants to get them to leave peacefully.

So once taxpayers find about this trend, what are the chances they'll look the other way for bailouts of either banks or borrowers?

How far will prices have to fall to re-ignite the housing market?

There's an interesting op-ed piece by Peter Schiff, president of Euro Pacific Capital and the author of "Crash Proof: How to Profit From the Coming Economic Collapse" in today's LATimes which argues that the only way the housing market can rebound is if prices fall more in line with incomes.

Ok, fair enough. But also realize that Mr. Schiff has a book entitled "Crash Proof: How to Profit From the Coming Economic Collapse," so in a way this is a free PR gift courtesy of the Times. I'll have to keep that in mind if I ever write a book!

Here are some of Mr. Schiff's arguments:

The government is trying in vain to get funds flowing again and put a floor under prices. But it's too late. U.S. home prices are like a beach house supported by eight pillars: lax lending standards, low down payments, "teaser" interest rates, widespread real estate speculation, pliant appraisers, willing lenders, easy refinancing and a market for mortgage-backed securities. Knock out even half of these pillars and the house comes crashing down. We've knocked out all of them. Yet everyone hopes that this allegorical house can defy gravity and that bubble-era prices can be sustained in a post-bubble world...

At current levels, the average American still can't afford the average house. Despite the creativity of its new policies, Washington can't alter that math. The only mechanism to restore balance and get the credit flowing is for prices to fall steeply to a true market level, and for losses (for consumers and corporations) to be recognized and absorbed.

Anecdotal and statistical evidence supports this. Foreclosed homes at auction quickly find buyers and financing when price declines are severe enough. February's existing home sales figures showed the largest year-over-year price drop on record. And it was also the first month that the number of sales ticked upward in a year...

Ok, but isn't it also possible that the reason median sales prices are dropping is because so many of the homes being sold are foreclosures to buyers only in search of major bargains?

The quicker home prices find a sustainable bottom, the quicker our economy can truly recover.

Instead, the government is trying to float our allegorical collapsed beach house on a flood tide of new liquidity. But the fixes compound the problem. They're creating runaway inflation, shrinking the value of the dollar -- and heading toward unprecedented government meddling in the marketplace and a diminished sanctity of contracts.

Schiff is certainly not alone. In last week's LATimes week-long "dust-up" between economist Chris Thornberg and Paul Leonard, the director of the California office of the Center for Responsible Lending, Thornberg agrees prices must decline while Leonard insists that lax regulation was to blame (and which I think both are true). From Thornberg's argument:

Home bubbles are nothing new. We had one in the late 1980s, another in the late '70s and certainly many others before then. The bubbles are characterized by people buying an asset, in this case a home, and thinking they can sell it at a higher price regardless of the fact that the price being paid is completely out of whack relative to fundamentals such as income. At their root, all bubbles are driven by individual greed -- the desire to make money.

Think of it this way: Every buyer over the last few years had a choice: Buy a home or rent an apartment until income was more in line with prices. Many leaped into the housing market even as prices climbed to such high levels because they thought they could sell at a higher price. To a degree, they were all speculators. This bubble is larger than any we have seen since at least World War II because the sub-prime markets gave buyers the means to speculate like never before. As a result, prices went up like never before. This isn't a sub-prime problem; it's the same old greed problem on sub-prime steroids...

And for many borrowers, this was certainly true.

No one likes to think of a family thrown out of a house. But many people made a very unwise decision in recent years: They bought a house they couldn't possibly afford. Needless to say, they had help from the real estate agent who told them that prices couldn't fall, the mortgage broker who promised them they could refinance easily in a year or two to cover the higher payments, and, of course, from a financial community that bought sub-prime-backed securities despite all the evidence of everything that was going wrong. Now that the house of cards is falling, all parties are taking a hit.

So how do we sort out the guilty from the victims? I'm not sure we can, especially given the past performance of our federal government regarding the financial and housing sectors, which points to a bailout of everyone involved. I know, it's not fair, but few things are in today's world -- especially when politics are involved.

So what does Mr. Leonard say in his part of the 'dust-up' piece?

Sub-prime loans -- many of which had stated-income requirements without verification, low teaser rates, no down payments and aggressive marketing tactics by brokers who had strong financial incentives to close loans -- increase chances of foreclosure. Reckless lending with little regulatory oversight helped get us into this mess.

Foreclosure spillover has much broader consequences -- for neighbors, local government services and our state and national economies. The Center for Responsible Lending recently estimated that 356,000 foreclosures will occur in California in 2008-09. With each foreclosure reducing surrounding home values by nearly 1%, we estimate that 7.5 million owners who live near foreclosed properties will lose a total of $107 billion of wealth in their homes. Possible municipal bankruptcies and deep local government program cuts, combined with historic levels of state budget deficits and the looming national recession, are all byproducts of the highest foreclosure levels since the Great Depression.

People are very big lately on channeling "The Great Depression," but there are some key differences including far different levels of unemployment, a global economy that's still doing ok and a Federal Reserve system that has more levels at its disposal. This might be a good time for HBO to bring back that weird show "Carnival" as a reminder. More from Mr. Leonard:

Given industry apathy toward voluntary loan modifications, the only way to achieve meaningful relief on a larger scale is to tweak bankruptcy laws. Courts should be allowed to restructure mortgages on family's homes. Most loan modifications would occur voluntarily outside of court with no cost to taxpayers. Bills in the House (H.R. 3609) and the Senate (Sen. Richard Durbin's bill, S 2636, included as Title IV of the Foreclosure Prevention Act) would give judges the authority to modify harmful sub-prime mortgages to provide families with one last chance to save their homes. These bills would help some 600,000 families avoid foreclosure.

But what would the consequences of that be? According to Thornberg, higher interest rates to account for more lending risk:

Years ago, in an effort to make buying homes cheaper, the home asset was opted out of the bankruptcy system. Because the home is a secured asset that could be repossessed in the event of a lack of payment, we all have enjoyed lower interest rates. But the game is simple -- if you can't make the payment, you lose the house. To change the game now is to violate this simple rule; that violation will lead to high costs of capital in the long run for anyone playing in the housing market.

New website launched for MetroIntelligence

Yes, I know I've been a bit remiss on blogging activity over the past few days, but there's a good reason: we've been focused on a redesign of our MetroIntelligence website, which just went live this afternoon.

This is only Version 1.0, but provides a good overview of the kind of work we do at MetroIntelligence, some interesting case studies of specific engagements from the past, links to various press quotes, published articles and speeches and headline news from the likes of BuilderOnline, BigBuilderOnline, Yahoo! Finance, AP, The Wall Street Journal, CNNMoney, The New York Times and more to come.

Over time we'll be adding more useful functionality to the site including event listings, more news feeds, data links, a bookstore and anything else that assists our visitors.

As always, please feel free to offer commentary to pduffy@metrointel.com.

And yes, I'll be catching up on blogging starting tonight.

March 28 edition of BuilderBytes released

The March 28th edition of BuilderBytes has been released, available either by email subscription or at a separate website. Some highlights from this edition:

The Builder Who Pushes Tokyo Into the Clouds
The New York Times
TOKYO — Minoru Mori, Japan’s most prolific developer, will finish the world’s tallest building in May. Many of his colleagues might consider the 101-story Shanghai World Financial Center the crowning achievement of a long career. But Mr. Mori has lots of plans for a 73-year-old.

California Utility to Install Solar Panels
The New York Times
An electric company plans to install a huge patchwork of solar cells, 10 times bigger than any previous such installation, on more than 100 large rooftops around Southern California.

Best Buyers Market Forecast in 2008
Housing Predictor
When it looks bad and it looks like things are going to get worse that’s the time to pull the trigger and buy real estate to have the highest probability of making top profits investing in real estate. That’s the consensus of veteran real estate investors, who have made fortunes investing.

Condo Prices Fall by a Smaller Percentage than Home Prices
Multi-Housing News
Washington, D.C.--Average condo and co-op prices across the country have been falling in the last year, according to the National Association of Realtors’ 2008 research on existing home prices.

Bush Admin. proposes sweeping overhaul of banking regulation

Apparently studied for over a year (and well before the sub-prime mortgage market started its meltdown), the Bush Administration has proposed an extensive overhaul of how the federal government regulates the banking system, although given a Democratic-controlled Congress, the process could take some time. From an L.A. Times story:

The Bush administration is proposing a sweeping overhaul of the nation's financial regulatory system, combining what is now an alphabet soup of government agencies into three streamlined regulators.

The proposal is the result of a year of study by Treasury Secretary Henry M. Paulson Jr. and has the support of the president, according to Treasury officials who spoke on condition of anonymity Friday...

The Securities and Exchange Commission and a handful of other federal agencies -- all formed in the Great Depression or earlier -- would be restructured and have their responsibilities redefined.

Oversight of the mortgage industry would be stepped up, and states could lose some of their authority to regulate banks...

An outline of the proposal, first reported by the New York Times late Friday and confirmed by Treasury officials, includes short-, intermediate- and long-term changes in the country's regulatory structure...

Many if not most of the changes would need congressional approval, which is far from certain. Both houses of Congress are controlled by Democrats, and this is a presidential election year, so any changes could take years...

In the short term, Paulson's plan proposes:

* Creating a Mortgage Originations Commission that would oversee the home-loan industry, making sure that state-level licensing conformed with a set of new federal minimum standards.

* Consideration of what kind of regulation should be put in place for investment banks that wish to borrow directly from the Federal Reserve.

Paulson has said previously that, although the Fed this month agreed to make loans to securities firms on a temporary, emergency basis, those institutions would have to be more heavily regulated if they wanted permanent access to Fed lending.

In the medium term, Paulson proposes:

* Eliminating the distinction between thrifts and banks under federal law.

* Bringing all state-chartered banks under federal supervision, either through the Federal Reserve or the Federal Deposit Insurance Corp.

* Federal oversight of insurance companies.

* Integrating oversight of the futures and securities markets by combining the Securities and Exchange Commission with the Commodity Futures Trading Commission.

Ultimately, the administration's proposal envisions paring down financial market oversight to just three regulators: a "market stability" regulator based on the Federal Reserve; a "business conduct regulator" based on the current SEC and CFTC; and a "prudential oversight" regulator focused on depository banks, encompassing the current Office of the Comptroller of the Currency and the Office of Thrift Supervision.

A major Wall Street trade group, the Securities Industry and Financial Markets Assn., said in reaction to Paulson's blueprint that there was "universal agreement that it is time to modernize and revitalize the current system" of regulation.

"The present regulatory framework was born of Depression-era events and is not well suited for today's environment where billions of dollars race across the globe with the click of a mouse," the group said.

OCRegister's "Lansner on Real Estate" blog wins award

For a long period of time before launching this blog, I regularly read Jonathan Lansner's blog at the Orange County Register, "Lansner on Real Estate." Jonathan brings two very important elements to his daily posts: (1) he's a longtime Orange County resident (so he has the benefit of perspective and local knowledge); and (2) he's a longtime business writer for the paper, so he's comfortable with economic statistics, terms, methodology and can write comfortably about it. Unlike many real estate blogs, he also covers the entire real estate spectrum including apartments and the commercial market. Finally, he regularly interviews experts in various fields, making his blog one of the most well-rounded in the blogosphere.

But I'm certainly not the only one who noticed: besides regularly topping blog directory lists as one of the Internet's most popular real estate-oriented sites, his blog was just named by the Society of American Business Editors & Writers for a "Best in Business" Award:

Lansner on Real Estate was one of three winners in the medium-size Web site category. (Other blog winners were the Fort Worth Star-Telegram’s “Barnett Shale: Drilling for Answers About the Natural Gas Boom in North Texas” and Seattle Post-Intelligencer’s “Todd Bishop’s Microsoft Blog.)

SABEW judges said of this blog: “Lansner takes advantage of the Web to deliver complex material to readers that can help them make important decisions about their business and personal lives. His blog creates a discussion and an environment where people can engage. And that’s what a blog is.”

The Register also won a SABEW certificate of merit for its coverage of the subprime lending mess. To read more about the 13th annual awards from SABEW, the largest U.S. trade group for financial journalists, CLICK HERE!

Congratulations, Jonathan on a very well-deserved award.

Positive fall-out from the Bear Stearns rescue

Economics is one of the most complicated social sciences one can study, and for good reason: besides the basics of supply and demand, the roles of human psychology and the inter-relations of a complex economy in today's world can be confusing. That's why I liked an article by David Weidner in today's MarketWatch.com on how the Bear Stearns bail-out may actually help save Main Street:

If you're thinking about refinancing your mortgage, getting a loan to buy a new car, or switching to a lower-interest rate credit card, you can thank the Federal Reserve for your ability to do so.

You might also want to mention that the recent boost to your 401(k) portfolio is appreciated as well.

Though it may not be obvious, anyone who participates in the credit world -- and that's most of us -- owes the Fed a debt of gratitude for stepping in and helping to prevent the collapse of Bear Stearns Cos...

Sure, the Fed is taking it on the chin. Taxpayers will buy a boatload of sketchy securities from Bear and hope that they produce any kind of return. J.P. Morgan Chase & Co. with the Fed's backing, will absorb the rest of Bear through a buyout. Taxpayers will probably take a loss, but no one knows how much it will be. It could be $29.9 billion. It could be half that, or nothing.

The move is unprecedented. The Fed on rare occasions has backed up banks, but it's never backed up investment banks. The idea that investment banks get bank protection is what should be debated, but no, everyone wants to know if the little guy is getting screwed...

Call it a bailout or call it corporate welfare, Timothy Geithner, the New York Federal Reserve president, had something else in mind when he forced Bear into the arms of its rival and took responsibility for $30 billion in its assets: the financial system.

"Main Street, directly or indirectly, by holding mutual funds, by having a pension in mutual funds or insurance invested in securities -- all of these are ways the person on the street has an interest in a stable financial system," said Lawrence J. White, a New York University professor who served on the Federal Home Loan Bank Board during the savings and loan crisis.

"The ability of an individual to get credit also" comes from Wall Street, White said...

It's those kinds of truths that get lost in the rhetoric in Congress or on the campaign trail. The latest to chime in, Republican John McCain, said on March 25 that he didn't favor government intervention either for "big banks or small borrowers."...

Sorry John, but an economic collapse wouldn't be limited to those who made bad bets or mistakes.

To his credit, Senator McCain did admit that economics are not his strong suit. Yes, John, we know! So what say Senators Clinton and Obama?

Obama has said he'd like to create incentives for lenders to refinance mortgages and he wants crack down on irresponsible lenders. Most of the candidate's policies are tougher standards for lenders not borrowers.

Sen. Hillary Clinton has proposed a $30 billion program to help troubled home borrowers. She also wants to get former Fed chairmen Paul Volcker and Alan Greenspan on the job. But she also offered an honest assessment of the Bear Stearns bailout...

Though she stopped short of endorsing the Fed's bailout of Bear Stearns, she's come the closest of any candidate to acknowledging that Wall Street and Main Street are just two names for the American credit highway...

So, if the Fed is backing up investment banks like it does commercial banks, then shouldn't investment banks be under tighter controls? Isn't this intervention the equivalent of creditor insurance for those complex loan agreements between Wall Street banks?

If so, then there are bigger questions at stake than whether or not some fat cats got bailed out. Wall Street has been living a life of freewheeling risk, built around the fact the industry was doing it on its own dime. Backed by taxpayers, brokers may be subject to capital requirements, managerial competency standards and restrictions on what kinds of business it can do.

In other words, they'd be just like regular banks.

Home equity lenders preventing short sales and refinancing?

Looking for another reason why a government bailout is becoming closer to a sure thing?

Because we live in a country in which self interest is not only encouraged, but often forced upon companies which must answer to shareholders, investors and Wall Street. And few sectors of the economy demonstrate this self-interest more than mortgage lenders, which is why calls by John McCain for voluntary compliance by lenders for workouts in the name of "helping your country" not only reveals his economic ignorance, but makes me wonder if he, like Rip Van Winkle, has been asleep for the last 30 years. Whatever national values he might have fought for when he was captured and tortured in a POW camp for 5 years seems to be long gone (one thinks he might have seen the writing on that wall when he ran against Karl Rove's version of politics in 1999). Sorry, John. I think it's a shame, too.

It seems that providers of home equity lines/loans -- who are generally in a second-tier position behind first mortgage loans -- are now protecting their investments (at least whatever shows up on their balance sheets if not in reality) -- by not agreeing to short sales in which they get short-changed and preventing homeowners from refinancing unless they pay down their equity balances. I'd say that this almost forces the government to step in because for all of their economic 'expertise,' the Bush Administration doesn't seem to have noticed that self-interest can also turn around the bite the hands that feed them. From a New York Times story:

Americans owe a staggering $1.1 trillion on home equity loans — and banks are increasingly worried they may not get some of that money back.

To get it, many lenders are taking the extraordinary step of preventing some people from selling their homes or refinancing their mortgages unless they pay off all or part of their home equity loans first. In the past, when home prices were not falling, lenders did not resort to these measures.

Such tactics are impeding efforts by policy makers to help struggling homeowners get easier terms on their mortgages and stem the rising tide of foreclosures. But at a time when each day seems to bring more bad news for the financial industry, lenders defend the hard-nosed maneuvers as a way to keep their own losses from deepening...

While homeownership climbed to record heights in recent years, home equity — the value of the properties minus the mortgages against them — has fallen below 50 percent for the first time, according to the Federal Reserve.

Lenders holding first mortgages get first dibs on borrowers’ cash or on the homes should people fall behind on their payments. Banks that made home equity loans are second in line. This arrangement sometimes pits one lender against another.

When borrowers default on their mortgages, lenders foreclose and sell the homes to recoup their money. But when homes sell for less than the value of their mortgages and home equity loans — a situation known as a short sale — lenders with first liens must be compensated fully before holders of second or third liens get a dime.

In places like California, Nevada, Arizona and Florida, where home prices have fallen significantly, second-lien holders can be left with little or nothing once first mortgages are paid...

Lenders and investors who hold home equity loans are not giving up easily, however. Instead, they are opposing short sales. And some banks holding second liens are also opposing refinancings for first mortgages, a little-used power they have under the law, in an effort to force borrowers to pay down their loans...

Disagreements arise when the first and second liens are held by different banks or investors. If one lender holds both debts, it is in their interest to find a solution.

When deals cannot be worked out, second-lien holders can pursue the outstanding balance even after foreclosure, sometimes through collection agencies. The soured home equity debts can linger on credit records and make it harder for people to borrow in the future...

Other lenders like National City, the bank based in Cleveland, have blocked homeowners from refinancing first mortgages unless the borrowers pay off the second lien held by the bank first. But such tactics carry significant risk, said Michael Youngblood, a portfolio manager and analyst at Friedman, Billings, Ramsey, the securities firm. “It might also impel the borrower to file for bankruptcy,” and a judge could write down the value of the second mortgage, he said.

A spokeswoman for National City, Kristen Baird Adams, said the policy applied only to home equity loans originated by mortgage brokers.

Underscoring the difficulties likely to arise from home equity loans, a Democratic proposal in Congress to refinance troubled mortgages and provide them with government backing specifically excludes second liens. Lenders holding a second lien would be required to write off their debts before the first loan could be refinanced. That could leave out a significant number of loans, analysts say.

People with weak, or subprime, credit could be hurt the most. More than a third of all subprime loans made in 2006 had associated second-lien debt, up from 17 percent in 2000, according to Credit Suisse. And many people added second loans after taking out first mortgages, so it is impossible to say for certain how many homeowners have multiple liens on their properties.

Tales of a real estate stalemate

When the housing boom turned on a dime into a bust, most builders of new homes first tried incentives, and then when that became the 'new normal' turned to price declines, thus ushering in programs such as price guarantees. Unfortunately, the same rational view of supply and demand was not observed by the existing home market (other than foreclosures, of course), with many sellers with listings attached to home values that may not get for years. From an a story in the New York Times (and a hat tip to the very well-visited Patrick.net, with 53,000 visitors on Monday!):

Overall home sales have fallen a remarkable 33 percent since the summer of 2005. Home prices, on the other hand, continued to rise until 2006 and are now only 5 to 10 percent below where they were in mid-2005, according to various measures.

In most other areas of the economy, this combination of plummeting sales and stable prices would not happen. When demand for airline tickets drops, the airlines cut their prices until they have sold their seats. When stocks become less appealing, share prices fall, sometimes sharply...

Real estate, though, is different. For both economic and psychological reasons, there is no asset more conducive to hopeful overvaluation.

That means real estate slumps tend to grind on for years, until sellers submit to reality and reduce their prices. This week’s batch of economic reports suggest that the adjustment is finally starting to happen. The decline in house prices is accelerating, especially in some of the big metropolitan areas covered by the Case-Shiller index released Tuesday, while the number of home sales has recently risen a bit.

But prices still have a ways to fall. Relative to the economic fundamentals — like incomes and housing supply — the average price nationwide seems to be about 10 percent too high. (This, of course, hides a lot of variation. In Texas, prices look sensible, while in much of Florida and Arizona, they are probably about 25 percent too high.)...

Until house prices stop falling, it won’t be clear how many more people will default on their mortgages. Even homeowners who stay current on their mortgage payments will be affected. With the value of their largest asset dropping, many will decide to spend less and save more, aggravating the economic slowdown...

In many ways, it would be better if the housing correction would happen more swiftly and sharply. The pain might be worse, but it would be over quickly. We seem to understand this principle when we’re removing a bandage. Why, then, is it so much harder with housing?

Because houses are almost perfectly engineered to trick owners into overvaluing them.

For starters, people have an obvious emotional connection to their house. After you have raised a family or enjoyed long meals with friends there, you are naturally going to place a higher value on it than a dispassionate buyer would. It’s your home....

In the wake of the biggest housing boom on record, it’s understandably hard to accept a new reality. Robert Glinert, a real estate agent in the Los Angeles area, said he has recently been saying no to almost half the sellers who have asked him to represent them. Their initial asking price is just too unrealistic.

“People say, ‘I don’t care about the market — my home is still worth what I paid for it in 2006,’ ” Mr. Glinert told me. “And I say, ‘To you. Only to you.’ ”

Doing what Mr. Glinert is asking sellers to do — dropping the asking price below their purchase price — is especially difficult. It’s tantamount to admitting defeat.

David Laibson, a leading behavioral economist, categorizes this sort of behavior under the heading of “the principle of the matter.” His point is that people often go to great lengths to avoid taking a loss — or simply having to acknowledge one. “Even a small loss evokes a sense of frustration,” said Mr. Laibson, a professor at Harvard. “There’s something magical about ‘at least breaking even.’ ”

Often, this hurts no one so much as it hurts the would-be sellers. They stay in homes where they no longer want to live, rather than accepting their loss and moving on. Or they move but endure the hassle of renting out their old home, waiting, usually in vain, for the mythical buyer who understands its charms. All the while, their money is tied up in the house, and inflation is eating away at its real value.

Translation: people are weird.

Consequences of a housing bailout: a falling dollar

Due to the size of a potential housing bailout of $1 trillion or more, Reuters UK columnist James Saft argues that it will be very tough for the U.S. economy to avoid inflation:

If the United States bails out the financial system by buying mortgage debt directly, the price just might be surging inflation and a dollar crisis.

Calls are increasing for the government, either directly or via the Federal Reserve, to cut the knot of the credit crisis at a stroke by buying up mortgages that banks and investment banks are finding difficult to finance...

Such a bailout would either have to be paid for by taxes, which seems unlikely, or would involve issuing more government debt or effectively expanding the money supply.

"There would be an inflationary impact because of the huge introduction of credit," said Philip Gisdakis, strategist at Unicredit in Munich.

"It's not $50 billion; we are talking about more like $1 trillion. This injection of capital you need will have consequences for the U.S. economy."

A bailout of that size is very likely to stoke inflation, which is already uncomfortably high, by effectively creating more dollars and putting them into circulation...

To be sure, there is no political consensus for a major bailout, which is openly opposed by the Bush administration and would face serious difficulties gaining agreement in an election year. The U.S. Treasury said on Wednesday that proposals it had seen would do more harm then good.

That is partly why there has been such a startling turn around on allowing Fannie Mae (FNM.N: Quote, Profile, Research) and Freddie Mac (FRE.N: Quote, Profile, Research) to take on more risk and buy more mortgages. While their debt has an implicit government guarantee, they are shareholder owned.

But the $200 billion in new lending allowed to Fannie and Freddie by their regulator, The Office of Federal Housing Enterprise Oversight, might not prove enough...

The question of how deep a dollar fall that implies is really in the hands of the United States' foreign creditors, like China and the Gulf states. Because they peg their own currencies to the dollar, exporting more to the United States than they import, they are regular dollar buyers.

A falling dollar causes inflation for them, a price thus far they have been willing to bear as a cost of a profitable trading relationship.

But eventually, if inflation and a dollar fall interact toxically, support from abroad might just dry up.

"If (foreign creditors) decide that they are not going to accept the inflationary policies of the Fed, you could see a pretty disorderly collapse," said Drayson.

"If we are talking a trillion dollars plus (bailout), it will be quite hard to avoid inflation as a consequence of that."

There are, of course, also consequences to the alternative course, which may lead to a round of failures by financial institutions.

In either event, the stakes are high.

Treasury Secretary Paulson says housing prices should be allowed to fall

Treasury Secretary Henry Paulson agrees with both the Bush Administration (of which he is a part) and Republication presumptive nominee John McCain that the government should stay out of the housing market and let the market dictate where prices will fall. From an L.A. Times article:

Housing prices need to fall further to permit shell-shocked housing markets to stabilize and policy-makers should not interfere with that process, Treasury Secretary Henry Paulson said on Wednesday...

"A correction was inevitable and the sooner we work through it, with a minimum of disorder, the sooner we will see home values stabilize, more buyers return to the housing market, and housing will again contribute to economic growth," he said.

Despite calls to "do something about housing," the focus should be on "choosing policies that minimize the impact of -- but do not slow -- the housing correction," Paulson said...

Paulson said only about 2% of U.S. home mortgages were in foreclosure but said that as many as 2 million foreclosure starts might occur this year. In addition, he said that 8.8 million households may now have negative home equity -- meaning their mortgages are higher than the house could be sold for -- and said that will rise.

Still, he said that if homeowners who are "underwater" on their mortgages walk away from them, they are no more than speculators and don't deserve special help...

He noted that a number of lawmakers have proposed initiatives to ease the strain on homeowners and welcomed their ideas but added "most are not yet ready for the starting gate."

Democratic lawmakers are pressing for a more active government hand to ease the strain on hard-pressed homeowners, possibly through purchases, restructuring and resale of failing mortgages, but the Bush administration has trurned a cold shoulder to such suggestions.

McCain prefers a hands-off approach to the housing market

As opposed to Democratic candidates Clinton and Barack, John McCain is continuing to insist that the government has no role in bailing out investors, lenders and homeowners who got in over their head (although admitting at the same time that the economy 'is not his strong suit.'). From a CNNMoney.com story:

Republican John McCain said Tuesday that government isn't in the business of saving and rewarding banks or small borrowers who behave irresponsibly though he offered few immediate alternatives to fixing the growing housing crisis.

"I will consider any and all proposals based on their cost and benefits," the certain GOP presidential nominee, who has acknowledged in the past that the economy is not his strong suit, told local business leaders south of Los Angeles.

Democrats accused McCain of lacking the skills needed to lead a country on the brink of recession.

"Instead of offering a concrete plan to address the crisis at all levels, McCain promised to take the same hands-off approach that President Bush used to lead us into this crisis," Democratic Party Chairman Howard Dean said in a statement...

On Monday, Democratic presidential candidate Sen. Hillary Rodham Clinton proposed several remedies to the home mortgage problems, including greater protections for lenders from possible lawsuits by investors, a variation of so-called tort reform.

McCain, in the midst of a weeklong western fundraising swing, focused on the home-financing crisis at an event in the Republican bastion of Orange County as he tried to rebut Democratic criticism of his economic credentials.

His pitch, though, offered little in the way of specific proposals to immediately address the crisis.

McCain said he wants to leave the door open to a wide array of proposals to address the problems and seemed to suggest he might even be open even to solutions that stray from the GOP line.

"I will not play election-year politics with the housing crisis," he said, adding he would evaluate all proposals. "I will not allow dogma to override commonsense."

But the small-government advocate and four-term Arizona senator also put restrictions on how far he was willing to go.

"I have always been committed to the principle that it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers," McCain said. "Government assistance to the banking system should be based solely on preventing systemic risk that would endanger the entire financial system and the economy."...

He said any government assistance to alleviate the housing crisis must be temporary and should be accompanied by reforms that aim to make the system more transparent and accountable to prevent a repeat of the crisis. He said no assistance should be given to speculators, or people who bought houses to rent or as second homes.

Ok, I'm all for regulatory reforms (a bit too late, yet better than never), but if people LIED about getting into loans they couldn't afford (that's why they were called "liar loans"), just how is a government that has demonstrated little competence in such matters of detail hoping to verify just who was a speculator, an investor or a second-home buyer? All any of them have to do is re-establish residency in the home in question to make that their principal home, unless the government plans to involve the IRS, the FHA or another group to conduct some forensic accounting to separate the needy from the greedy.

In the short term, he called for the country's accounting experts to meet to discuss current accounting systems and said the country's top mortgage lenders should pledge to do everything possible to help their cash-strapped but creditworthy customers.

"They've been asking the government to help them out," McCain said of lenders. "I'm now calling upon them to help their customers, and their nation, out."

Not gonna happen, Senator. We punish the drug dealers in the "War on Drugs" yet ask for voluntary compliance when the pushers are dealing with mortgages and not crack.

As a freshman senator, however, McCain took a different approach. In early 1991, the Senate's ethics committee concluded that McCain "exercised poor judgment in intervening with the regulators" on behalf of banker Charles Keating Jr. Keating was a wealthy Arizona real estate developer and owner of a California thrift that failed during a nationwide savings and loan crisis - when Keating and other bankers made risky investments with depositors' money.

McCain was known for accepting contributions from Keating, flying to the banker's home in the Bahamas on his company planes and taking up Keating's cause with U.S. financial regulators as they investigated him. Keating served more than four years in prison for fraud.

New home sales fall by 1.8% nationally but up slightly in the West

The Commerce Dept. has released their latest statistics on the new housing market, which shows a 1.8% decline to an annualized rate of 590,000 units -- the lowest level seen since February of 1995, while the median sales price dropped by 2.7% to $244,100. From an AP story via MSNBC:

The number of unsold homes on the market at the end of the month represented a 9.8 months’ supply at the February sales pace, the same as in January. That was the highest inventory level in more than 26 years and reflects the fact that increased numbers of mortgage foreclosures are dumping even more homes on an already glutted market.

Sales dropped the most in the Northeast, falling by 40.6 percent. Sales were also down in the Midwest, dropping by 6.4 percent, but posted gains in the South of 5.7 percent and 0.7 percent in the West....

Analysts said that housing is being hurt currently by tighter lending conditions as banks react to soaring mortgage defaults and the reluctance of prospective buyers to make a decision, fearing that prices have further to fall.

Existing home price declines greatest in overbuilt markets

The latest S&P/Case-Shiller data shows a record decline of nearly 11% for the annual period ending January 2008, with the steepest falls found in over-built Las Vegas (-19%), Miami (-19%) and Phoenix (-18%). In Southern California the declines were all far into the double digits, led by San Diego (-17%), Los Angeles (-16%) and San Francisco (-13%). From a CNNMoney.com story:

The S&P Case/Shiller Home Price index of 20 key markets, released Tuesday, shows that home prices plunged 10.7% in the 12 months ending January. That marks their lowest level since the index launched in 2000.

Of those 20 metro areas, 16 reported record annual declines. Ten of those cities posted double digit declines through the 12 months that ended in January.

The survey's 10-city index fell 11.4% year-over-year, its steepest decline since its inception in 1987...

While regional declines in home prices are not uncommon, the current decline is the "first national decline we've had," said Robert Shiller, Yale professor of economics and co-founder of the index.

"In a historical context we're down substantially, down more than at any other time that we've been keeping track," he added...

Michael Strauss, chief economist at investment firm Commonfund, says that steep price declines are no surprise, given the number of homes on the market.

"When inventory is so high we're likely to see a decline in prices," he said.

Cities like Las Vegas and Miami, where speculative buyers helped fuel the housing boom, are seeing sharp reversals.

"Some of the cities that soared the most are now retracting the most," according to Strauss. "Though it may be disappointing to some, from an economic stand point it makes a lot of sense."...

Mike Schenk, senior economist for the Credit Union National Association, says the decline in home prices is a symptom of serious economic problems, but adds that the environment is improving for home buyers.

"Affordability is actually quite high," he said. "This is a pretty good market to consider taking the plunge. And it's going to get better as we go forward."...

Across the nation, the market for lower-priced homes has been the most volatile over the last 12 months, a phenomenon Shiller thinks is a result of the ongoing subprime crisis.

"It's going to take those markets a long time to recover," Shiller said.

Wave of Foreclosures Impacting Multiple Markets

Given today's report by the NAR on a rise in existing home sales but a decline in median prices, it's not hard to imagine the reason for the trend: sellers -- including many banks owning foreclosed properties -- have reduced prices to move inventory. Now that the number of foreclosed properties is growing, lenders are growing increasingly serious about ensuring that the number of vacant homes on their hands doesn't become an unmanageable avalanche.

What's somewhat surprising are the regions in which the percentage of foreclosed homes to all housing units is relatively high: such as Chicago (2.5%), Atlanta (1.8%), New York (1.2%) and Denver (2.4%).

From a Wall Street Journal story:

A glut of foreclosed homes of historic proportions is starting to drive down U.S. home prices faster as lenders put more properties on the market and buyers show signs of interest.

The ability of America's lenders to manage this fire sale will be crucial to determining how long the housing market stays in the dumps -- and how quickly blighted neighborhoods can heal. The oversupply is severe: In some major markets, including Las Vegas and San Diego, foreclosure-related sales have accounted for more than 40% of all sales in recent months.

On Monday, new data suggested that pressures like these are starting to drive prices low enough to attract some buyers back into the market. Sales of previously occupied homes jumped 2.9% in February from the month before, the National Association of Realtors said, the first increase since July....

Banks and others holding foreclosed property have concluded "we've got to move things" and are finally willing to slash prices, says Thomas Lawler, a housing economist in Leesburg, Va.

The supply is piling up fast. Overall, the total number of lender-owned homes doubled last year but sales grew only 4.4%.

At the same time, the specialist firms that sell foreclosed homes for lenders say banks are sending them additional properties much faster than they can be sold. "They're coming in [at a rate of] two new properties for every sale," said Claudia Smith, vice president of operations for First American REO Outsourcing, which is handling roughly 8,000 foreclosed homes for lenders.

First American CoreLogic, a research firm based in Santa Ana, Calif., that collects data from lenders and county clerks, estimates that foreclosed properties held by lenders accounted for 493,000 of all homes on the market in January, up from 231,000 a year before. Properties like these represent roughly one of nine currently listed for sale nationwide, compared with a one-in-15 ratio a year earlier....

But foreclosures also can help bring prices in high-cost areas down to levels that are affordable to teachers, fire fighters and other middle-class buyers who may have been priced out of the market during the housing boom.

U.S. Rep. Barney Frank, a Massachusetts Democrat, recently announced plans for legislation to provide $10 billion of federal loans and grants to help local government and nonprofit groups buy and renovate vacant foreclosed homes. The homes would have to be sold or rented to people with low or moderate incomes....

Prospects for the housing market also depend heavily on the job market. As measured by the S&P/Case-Shiller national index, home prices jumped 74% in the six years through 2006. During the same period, U.S. median household income rose just 15%. (Neither figure is adjusted for inflation.) That discrepancy made housing unaffordable for many Americans....

Lenders face dueling pressures when deciding how quickly to sell foreclosed properties. On the one hand, foreclosed homes tend to depreciate faster than occupied ones because they get less maintenance and quickly look forlorn. And the longer they sit unsold, the longer the lender must keep paying monthly expenses, including insurance and property taxes.

On the other hand, lenders must balance the pressure to clear their books with the fact that selling too quickly -- and at deep discounts -- could trigger big write-downs and devastate their quarterly results...

The fastest way to move foreclosed homes might be to sell in bulk to big investors, although that kind of transaction is highly unusual in the real-estate business. Nevertheless, some hedge-fund operators, including New York-based Paulson & Co., are considering whether to seek deals like these. There are big obstacles, however. One problem: Hedge funds aren't equipped to manage small properties scattered over large areas.

Another sticking point is price. Mary Coffin, an executive vice president who heads the loan-servicing business of Wells Fargo, says investors have approached her bank to discuss "fire-sale" bulk purchases of homes, at as little as 20% to 30% of what the bank thinks the properties are worth.

"We're not there," Ms. Coffin says.

She thinks Wells can do better than that by selling homes one by one. Still, she says, Wells needs to prepare for the possibility of doing some bulk sales....

One big problem for sellers is that mortgage lenders have severely tightened their terms, requiring larger down payments and better credit records. As a result, many people interested in buying foreclosed homes can't get loans.

Another hurdle is that the lenders responsible for selling the homes don't own all of them. That's because many mortgages are sold to investors in the form of securities; therefore, the investors in those securities actually own the homes. The trust agreements that create securities like these require lenders to show that they are getting the best price possible for the homes. That makes it tough to cut deals with potential buyers seeking huge discounts.

Among the big owners of foreclosed properties are government-sponsored mortgage investors Fannie Mae and Freddie Mac, along with the biggest lenders, Countrywide Financial Corp. and Wells Fargo. Fannie Mae owned 33,729 homes at the end of 2007, up 34% from a year earlier.

Another big seller is the Department of Housing and Urban Development, or HUD, which operates the Federal Housing Administration. The FHA insures banks and investors against losses on mortgages, and ends up owning foreclosed homes. The average time it takes to sell has grown to 196 days from 175 a year earlier, says Laurie Maggiano, a HUD official.

About 30% of HUD's homes are in Ohio and Michigan. In those states, HUD late last year began offering a $2,500 rebate to buyers. HUD also has programs that allow buyers to make down payments of as little as $100...

HUD also has programs under which it sells homes at deep discounts, and sometimes for as little as $1, to local nonprofit developers who provide housing for low-income people. Ms. Maggiano says HUD is looking at ways of letting investors bid for large groups of homes.

Should the bankrtupcy laws be changed to include homes?

An idea floated lately in various circles to deal with increasing foreclosures is to 'tweak' the bankruptcy codes so it will include homes, thus forcing lenders to re-write loan terms and prevent them from foreclosing. But what are the long-term ramifications of this happening, given that homes are usually the only collateral lenders can repossess to help pay back the loan?

In today's Los Angeles Times, Paul Leonard, the director of the California office of the Center for Responsible Lending and Christopher Thornberg, a founding partner with Beacon Economics, debate the topic.

First, from Paul Leonard (pro-tweak):

The heart of the mortgage market's problems were and remain sub-prime loans. In California, data from the Mortgage Bankers Assn. show that while sub-prime loans make up 14% of total mortgages, they are responsible for about 60% of all foreclosures. Sub-prime loans -- many of which had stated-income requirements without verification, low teaser rates, no down payments and aggressive marketing tactics by brokers who had strong financial incentives to close loans -- increase chances of foreclosure. Reckless lending with little regulatory oversight helped get us into this mess.

Foreclosure spillover has much broader consequences -- for neighbors, local government services and our state and national economies. The Center for Responsible Lending recently estimated that 356,000 foreclosures will occur in California in 2008-09. With each foreclosure reducing surrounding home values by nearly 1%, we estimate that 7.5 million owners who live near foreclosed properties will lose a total of $107 billion of wealth in their homes. Possible municipal bankruptcies and deep local government program cuts, combined with historic levels of state budget deficits and the looming national recession, are all byproducts of the highest foreclosure levels since the Great Depression....

Given industry apathy toward voluntary loan modifications, the only way to achieve meaningful relief on a larger scale is to tweak bankruptcy laws. Courts should be allowed to restructure mortgages on family's homes. Most loan modifications would occur voluntarily outside of court with no cost to taxpayers. Bills in the House (H.R. 3609) and the Senate (Sen. Richard Durbin's bill, S 2636, included as Title IV of the Foreclosure Prevention Act) would give judges the authority to modify harmful sub-prime mortgages to provide families with one last chance to save their homes. These bills would help some 600,000 families avoid foreclosure.

Next, from Chris Thornberg (anti-tweak):

The mortgage loan modification plans put forward by the governor and, at various times and in various forms, by the U.S. Treasury Department all failed to fix the problems in the housing markets. Why? They pretended that the problem is the structures of the mortgages used to buy houses -- in other words, fix the interest rate and you fix the problem. Make the loan "fair" and everything will be fine.

Nothing could be further from the truth. The real issue in today's housing markets is that prices currently sit at levels that are unaffordable given income levels in our state...

Prices are going to fall one way or another; it's only a function of time. They simply aren't sustainable at their current levels.

So what caused prices to go so high? Home bubbles are nothing new. We had one in the late 1980s, another in the late '70s and certainly many others before then. The bubbles are characterized by people buying an asset, in this case a home, and thinking they can sell it at a higher price regardless of the fact that the price being paid is completely out of whack relative to fundamentals such as income. At their root, all bubbles are driven by individual greed -- the desire to make money...

People make mistakes. We give them a second chance by allowing them to bankrupt themselves out of debt they couldn't afford even if they arrived in this situation because they made an error. We pay for this right through high interest-rate premiums on consumer loans. Years ago, in an effort to make buying homes cheaper, the home asset was opted out of the bankruptcy system. Because the home is a secured asset that could be repossessed in the event of a lack of payment, we all have enjoyed lower interest rates. But the game is simple -- if you can't make the payment, you lose the house. To change the game now is to violate this simple rule; that violation will lead to high costs of capital in the long run for anyone playing in the housing market. In other words, changing bankruptcy laws as they relate to mortgages would punish those who made the prudent decision to stay on the sidelines and not buy something they couldn't afford.

Home sales up but only because of price drops?

Now that the Spring selling season is upon us, it looks as if sellers are going to have to be unemotional about setting sales prices if they hope to unload inventory. Because although overall sales activity is up, the consequence has been lower prices. From an AP story via the Orange County Register:

The National Association of Realtors said that sales of existing homes rose by 2.9 percent in February to a seasonally adjusted annual rate of 5.03 million units. It marked the first sales increase since last July, but even with the gain sales were still 23.8 percent below where they were a year ago.

Prices continued to slide. The median sales price for single-family homes homes and condomiums dropped to $195,900, a fall of 8.2 percent from a year ago, the biggest slide in the current housing slump. The median price for just single-family homes was down 8.7 percent from a year ago, the biggest decline in four decades.

Wall Street, which had been expecting another decline in sales, was encouraged by the February increase. But economists said they still believed any sustained rebound was many months away...

Lawrence Yun, chief economist for the Realtors, said that some formerly hot markets in California and Florida were seeing significant price declines now as sellers are cutting prices to attract buyers...

By region of the country, sales surged by 11.3 percent in the Northeast and were up 2.5 percent in the Midwest and 2.1 percent in the South. The only region of the country to see a sales decline was the West, where sales dropped by 1.1 percent.

The inventory of unsold homes dipped to 4.03 million units in February. That meant it would take 9.6 months to exhaust the supply of homes for sale at the February sales pace. That was down from January's level of 10.2 months but still about double what the months' supply had been during the peak of the housing boom.

Sales of existing homes fell by 12.8 percent in 2007, the biggest decline in 25 years, following an 8.5 percent drop in 2006.

Forbes.com announces new blog network

The Business and Finance Blog Network was officially announced by Forbes.com today, which will include The Housing Chronicles Blog. From the press release:

Today Forbes.com, home page for the world's business leaders, announced the creation of a Business and Finance Blog Network, comprised of a community of pre-screened, influential business and financial blogs.

The Blog Network's content will focus on senior business decision makers and high-net-worth investors. Topics will be relevant to the banking, trading, hedge fund management, affluent investing, and senior business decision-making communities. Participation in the network is by invitation only, and all blogs are vetted by Forbes.com editors for appropriate content, and to ensure that they are in keeping with the Forbes editorial brand...

The network will allow advertisers to target a highly engaged, exclusive niche audience of senior business decision makers and affluent investors easily and effectively...

Forbes.com (www.forbes.com), home page for the world's business leaders and the No. 1 business news source in the world, is among the most trusted resources for senior business executives, providing them the real-time reporting, uncompromising commentary, concise analysis, relevant tools and community they need to succeed at work, profit from investing and have fun with the rewards of winning. Throughout the business day Forbes.com publishes more than 3,500 articles, delivering the best of Forbes journalism and that of its selected partners with all the immediacy, depth and interactivity that the Web allows. Affiliated sites include: ForbesTraveler.com, ForbesAutos.com, Investopedia.com, RealClearPolitics.com and Clipmarks.com.

Tax breaks for homebuyers gets support in the Senate

An idea floated by homebuilders last month to encourage home buying through the use of tax credits to offset the perceived risk has gained some support in the Senate recently. Although the Bush Administration appears publicly wedded to its "no government bailout, let the markets work" stance, some experts think they're running out of time. From the Wall Street Journal:

Efforts to create new tax breaks to encourage home purchases are gaining attention on Capitol Hill, as lawmakers gird for a major debate this spring on how best to shore up the nation's troubled mortgage markets.

The Bush administration has looked at the pros and cons of a tax credit but remains opposed to the idea, saying it prefers lawmakers act quickly on administration proposals that are languishing in Congress. However, pressure may soon grow on the administration to look again at the idea. Some Democrats, among them Michigan Sen. Debbie Stabenow, have signaled support for expanded tax benefits. And the idea is proving especially popular among Senate Republicans, who are hoping to carve a distinct role as Congress takes up housing issues and often find tax cuts an appealing option. The discussions reflect a growing sense that the housing, mortgage and credit mess may require more expansive federal government action...

Striking a more aggressive posture than the White House, Democratic leaders have signaled support for legislation to create special taxpayer-backed programs to help troubled borrowers refinance into more affordable, low-cost mortgages, among other things.

While interest is growing in the housing tax breaks, it is by no means certain that they will ultimately make it into the legislative package. Critics complain the federal tax code already provides ample support for homeownership, offering a deduction for mortgage interest and allowing certain capital gains on home sales to be excluded from taxation.

Within the Bush administration, some aides are concerned that such a tax break might simply benefit individuals who would buy a home in any case. Treasury spokeswoman Michele Davis urged lawmakers to give priority to other initiatives. "We continue to believe Congress should focus on completing" bills to revamp the Federal Housing Administration and create a new regulator with broad authority over Fannie Mae and Freddie Mac, she said.

Sen. Stabenow is pushing a measure that would create a one-time tax credit of $3,000 for first-time home buyers. Mr. Isakson's proposal is broader, providing a $5,000 tax credit for the purchase of a single-family home. That credit could be claimed for three years, raising the total tax benefit to $15,000.

New condos about the hit the market will add to existing inventory

Building condos, especially those in large projects, is a lot trickier than building single-family homes. For one thing, they usually can't be built in phases, so once construction starts the builder has little choice but to finish the project. For another, the time in between when marketing begins and buyers move in can be as long as 3 years -- a period in which construction costs can rise and when both economics and buyer psychology can change dramatically.

Consequently, buyers who can't get financing or change their minds in a troubled market add to cancellation rates already approaching 40 or 50 percent for some projects, putting the squeeze on builders trying to pay back construction loans. Condo inventory -- already at 10 months -- will likely rise in markets such as Atlanta, Miami and San Diego as projects under construction are released to the market, although that could help bring down rents in those areas and provide opportunities for vulture investors. From the Wall Street Journal:

The condominium market is about to get worse as many cities brace for a flood of new supply this year -- the result of construction started at the height of the housing boom.

More than 4,000 new units will be completed in both Atlanta and Phoenix by the end of the year. Developers in Miami and Fort Lauderdale, Fla., are readying nearly 10,000 total new units in a market already struggling with canyons of unsold condos. San Diego, another hard-hit region, will add 2,500 units, according to estimates provided by Reis Inc., a New York-based real-estate-research firm.

The new building comes on top of unprecedented supply. The U.S. finished 2007 with a supply of condos large enough to absorb 10 months of demand, the highest level since the National Association of Realtors began the tally in 1999.

The deluge means bad news for developers and potentially lower prices, including in cities such as Atlanta and Dallas that have avoided the worst of the housing bust. If defaults and foreclosures rise, lenders will feel the pain too.

Regulators have been sounding the alarm for weeks about the exposure of small and mid-size banks to commercial real estate, which mostly means construction loans to developers of condos and single-family housing.

Lenders of all sizes have $42 billion of condominium debt on their books, according to Foresight Analytics. In just three months -- between the third and fourth quarters of last year -- the delinquency rate rose to 10% from 5.9%, says the Oakland, Calif., research firm.

The news isn't bad for everyone. Vulture buyers have started to circle, hoping to take advantage of foreclosed properties that banks may start dumping at fire-sale prices. Also, some condos are being converted to rental units, increasing supply for renters and putting downward pressure on prices...

However, developers and lenders can more easily shelve projects that are still in the early stages. Many developments nationwide are being canceled, suggesting that by next year or 2010, the number of new condos coming onto the market may slow to a trickle.

One big question hanging over the market is how many of the buyers who have put down deposits during construction will show up to close the deal. Some deposits were as little as 3% of the purchase price. The price of a condo has frequently fallen more than the amount of the deposit, giving the buyer an incentive to forfeit the deposit...

The rising supply is a reflection of the picture in 2004 through 2006 -- a time of huge demand for condos. Speculation was rampant as investors believed empty nesters and young professionals seeking an urban experience akin to what they watched on "Friends" would prop up the condo market for years.

Most projects take about three years from the time they are marketed to potential buyers to the time they are ready to be moved into. Deposits help developers get a construction loan that is to be paid off when the buyers close on their new condos years later.

However, cancellations are rising, meaning developers may not be able to pay back their banks. Peter Zalewski, founder of Condo Vultures Realty LLC in Miami, says condo developers he is working with are expecting 20% to 40% of buyers who put down deposits to walk away from the deal. In some areas, such as inland buildings and new projects along the river in Miami "walkaways" are expected to be even higher.

Unlike single-family housing, condos tend to be concentrated in certain areas, meaning the pain is limited to pockets of the country...

One option for a developer is to convert the condos to apartments. However, these projects are usually financed with the presumption that sales of individual condos pay off more than rents from a comparably sized apartment building. Also, lenders typically expect developers to pay off condo construction loans with the millions of dollars they receive when closing on the sales. Such a quick payout isn't possible if the developer is only receiving monthly rental payments...

As more condominium projects get into trouble, investors are looking to pounce. Some 700 people showed up for a distressed-real-estate conference this past week in Miami where the condo glut was the dominant discussion subject.

How lenders sometimes force borrowers to walk away from homes

A major consequence of the complexity of today's mortgage business is the difficulty borrowers are having to renegotiate loans, in large part because it's not easy determining exactly who owns the mortgage, but also because loan servicers don't have the power to change loan terms. From a CNNMoney.com story:

...it's much harder for troubled borrowers to get a deal that permanently lowers their mortgage payments. The Hope Now Alliance of mortgage lenders and servicers, including Citigroup (C, Fortune 500), Bank of America (BOA) and J.P. Morgan (JPM, Fortune 500), says it has kept over one million borrowers out of foreclosure since July. But only about one quarter of them - 278,000 - have actually had the terms of their mortgages modified.

Faith Schwartz, Hope Now's Executive Director, says the number of loan modifications is increasing. But she admits the vast majority are not getting their payments reduced. "If it's appropriate, they are," she said. "The key here is that it's between the servicer and the borrower. Every circumstance is different."...

Working out a new loan has also been a struggle for Odelle Boykin, a Connecticut home health care worker who housing advocates claim is a victim of a predatory lending.

Boykin says her mortgage broker promised her when she refinanced two years ago at a teaser rate she could afford that she could refinance again when the payments went up. She says when the loan was about to reset in October, with payments shooting up from $1,431 to $1,702 a month, she contacted the servicer, Fremont Investment & Loan, but the company told her it no longer handled refinancing. The payment is set to go up again next month.

"She was basically deceived," said Karen Nigol of the Housing Education Resource Center in Hartford. According to Nigol, Boykin would not have been able to afford the loan without earning more income than she did at the time of the loan application. Nigol says the mortgage broker listed Boykin as his employee on the application, even though she was unemployed.

"In fact, he said to her, 'Congratulations, you now work for me,' and put down an additional amount of income that really wasn't true," Nigol said....

A spokesman for Fremont, which services Boykin's loan, did not address the specific allegation that the mortgage broker had falsely reported Boykin's income on the loan application. Boykin never received a full copy of the loan application. The spokesman told CNN the company has forwarded her a proposed modification program and "...will be following up on the efforts made to reach the borrower directly to discuss the problem."

Cruz's loan servicer, America's Servicing Company, is owned by Wells Fargo (WFG) and said in a statement it "...cannot share specific customer loan information with anyone other than the customer. For the past several months, we have attempted to reach out to Mr. and Mrs. Cruz in an effort to resolve their situation, but have not had success in making contact with them."

With an apparent stalemate between lenders and borrowers, will people be forced to go into foreclosure or even to just walk away?

"Yes," said Connecticut Fair Housing's Erin Kemple. "The simple answer is yes."

So even more stupidity will follow that which followed. The solution? Government intervention, like it or not, because sometimes the unregulated free market just doesn't work properly.

The truth about new home price guarantees

A couple of weeks ago at a building industry function, I asked a panel of homebuilders including reps from Centex, Standard Pacific and John Laing why weren't offering price guarantee programs along the lines of those offered by KBHome and Ryland.

Their answer: most builders will refund money to a potential buyer still in escrow if the value of their home falls in between the time they sign the contract and closing, but you have to ASK for it. The fact that KBHome and Ryland are promoting the program has more to do with their ad strategies and creating higher comfort levels among potential buyers than a totally unique program. Although the fact that they have announced these programs would certainly make it easier for a home buyer to benefit, it's probably good advice to simply ask all builders what they plan to do should prices fall before homes close escrow.

The end of cheap credit

Even when newspaper and magazine articles were following the rise of cheap debt, they still acknowledged that it would someday come to an end. That end may be here, so what does it mean? From a Washington Post article:

Mounting turmoil in credit markets could realign the finances of households and businesses, as banks scramble to bolster their balance sheets and jettison risky customers.

For consumers, it could mean fewer credit card offers. For home buyers, it will mean tougher mortgage conditions. For many businesses, it will mean a substantial increase in borrowing costs and possible postponement of capital spending plans...

While most economists have long said that Americans need to borrow less and live within their means, the sudden, lurching nature of recent financial markets isn't what most of them had envisioned....

Commercial real estate firms are also in danger if they have relied heavily on borrowed funds for projects still underway.

"It seems that the huge economy of the United States is getting a huge margin call from the whole world," said one investment banker who spoke on condition of anonymity because he was not authorized to speak on behalf of his firm.

Housing bust decreasing mobility in Sunbelt states

One of the more significant impacts of the distressed housing market is the lack of mobility for a country accustomed to moving every 7 years. The Census Bureau has recently released a report for the annual period ending July 1, 2007 that shows the impact of decreasing mobility, including net population losses in Los Angeles County as well as parts of Michigan, Ohio and Florida. From an article in the Wall Street Journal:

Population increases in many fast-growing counties, particularly in the South and West, started slowing last year, suggesting that the housing crunch may be forcing many Americans to stay put.

People "are paralyzed in their quest for jobs in growing areas in many parts of the country because the housing market has shut down across the board," said William Frey, a demographer at the Brookings Institution, a Washington think tank.

The Census Bureau's annual estimate of county-population changes covers the 12 months that ended July 1, 2007. It shows that many Americans continued moving to sunny counties in Florida, Georgia and Arizona, but that the rates were slowing.

The data show a marked deceleration in population growth in several suburban counties that are farthest from urban centers -- the kind of counties to which some city residents had flocked in prior years for bigger houses and a different lifestyle. At the same time, urban areas and close-in suburbs were seeing population decreases slow, and in some cases reverse...

The slowdown of county-to-county movement pulled down expansion in other fast-growing counties. Population in California's Riverside County, which is east of Los Angeles, increased by 66,000 -- down from 80,000 between July 2005 and July 2006. In Texas's Harris County, where Houston is, the population increased by 60,000, less than half the gain between July 2005 and July 2006.

Some formerly highflying counties actually saw population fall. Broward County, Fla., part of the Miami-Fort Lauderdale metropolitan area, added an average of 28,000 residents a year between 2000 and 2005. But the county lost 13,000 residents between July 2006 and July 2007. That was the county's first population decline recorded by the Census Bureau.

Some cities and suburbs that had been losing people to outer areas saw the exodus slow. Cook County, Ill., which includes Chicago, had lost an average of 16,000 a year between 2000 and 2006. Last year it gained about 4,800. In San Diego, the population rose by 27,000 in the latest period, compared with an average gain of 5,000 a year between 2003 and 2006...

Movement from one part of the country to another often slows during economic weakness and sometimes spurs shifts. In the early 1980s, many people fled the industrial Midwest for Texas oil towns, then moved again when the boom ended. Earlier this decade, workers from tech firms in Northern California headed south after the late 1990s tech boom collapsed.

The housing market's woes, though, are working the other way. Demographers and headhunters suggest people may be staying put because they can't sell their homes or can't get financing for new ones...

Dru George, a partner at Austin McGregor, an executive search firm based in Dallas, said that in the past nine months he has had several executives turn down jobs in other places because of the financial hits they would take if they sold their homes. Some are "under water" -- that is, they paid more on their houses than they would get selling them -- he said.

"I'm doing a search in Austin, and I was speaking with candidates, East Coast, West Coast, in the South," he said. "A lot of these executives are $300,000 to $400,000 under water on their house. Do they sell it at a loss or stay put? That's something we see on a daily basis."