Is This the Solution to the Housing Problem?

"Here is how the government aims to solve the housing crisis: "The FDIC's program, which is underway at failed lender IndyMac, calls for making monthly payments more affordable by reducing interest rates, lengthening loan terms or deferring principal. Servicers aim to reduce payments to no more than 31% of a borrower's monthly income. So far, more than 10,000 delinquent loans have been modified, and offers have been made to another 20,000 borrowers."

So, the plan is to reduce the payments on the mortgage while keeping the amount of the mortgage the same?

That's nuts! Why would anyone commit to continue paying on a mortgage that is substantially greater than the value of their property ? Already, 20% (33% in May, 2009) of all mortgaged homes are underwater, worth less than the mortgage on it and that number will increase as home prices continue to plummet.

Talk about Moral Hazzard! Once homeowners realize that home prices are not coming back in their lifetimes, and that they have bailed out the banks but they are still stuch paying their losses, that strange music you hear will be Jingle Mail, the sound of keys being sent back to the banks in bunches!

There is only one realistic way to solve the homeonwer's dilemma, the same way it was done in the First Great Depression. Buy up the unaffordable mortgages at the value of 80% of the current market value of the home and refinance at that Loan to Value, in a fixed, 30 year loan at maybe 6% interest.

This will provide the debt relief and the payment relief that home owners need to be able to afford their homes and have money left for other bills.

I do not want to hear that the bank's will be taking a loss when the same homeowners have already poured Trillions of dollars into the banks as bailout funds and loan guarantees. What it will do is to stop the steady erosion of the bank assets that will continue as long as the mortgage problem is not solved, leading to further deterioration of the bank's assets which will prevent them from lending which will starve the economy of the funds it needs to operate.

Home prices to fall and fall and fall...

I just read an article forecasting more trouble for real estate in 2009.

The author seemed to be incredulous about that possibility, saying that some markets were even approaching Pre-Bubble price levels as though that was an organic impossibility.

If you check you will see that the last 2 real estate booms in the 70's and 80's resulted in prices dropping back to pre-boom levels before they took off again.

That is what statisticians refer to as a "regression to the mean," falling back to the historic trend line.

There are even more significant troubles for real estate in 2009 and beyond than are perceived by many real estate experts.

These troubles will continue to drive prices down even further. Although some markets are in fact approaching pre-boom prices, the pendulum may not stop at mid point and may actually swing all the way past pre-boom prices. Have you ever known a pendulum to stop mid way through its swing?

Here are some additional factors to consider:

The credit crisis is forcing banks to husband what little capital they have which is why they will restrict lending to the Very qualified.

How many prospective home buyers have 750+ FICO or Credit scores And 30% in cash for down payment, closing costs and bank mandated cash reserves? Especially since the US savings rate has been hovering around zero for the past decade.

Fewer buyers equal lower demand which means lower prices.

Also, how many more homes will be deserted by home owners who are Underwater, owing more than they owe? It is estimated that nearly 16% of owners with mortgages or about 8 Million home owners are in this situation. These desertions will add greatly to the bloated inventory of homes weighing down the market.

Finally, the only bright spot in housing will probably be extinguished in 2009 as interest rates will skyrocket once China is forced to stop buying our debt because of our dwindling purchases from them.

One report I read said that rental of a typical space on a freighter delivering goods to the US from China, fell from $236,000 for the trans Pacific crossing to $5,000!

Once China stops buying our Treasury Bonds, we will have to lower prices on them to attract other buyers, which will jack up their yields or interest rates as they move inversely to prices.

Our mortgage rates will then soar because they are pegged to the 10 year Treasury Bond yield.

So, despite the optimistic predictions of many rose tinted, shade wearing real estate "professionals" the likelihood of a rebound in housing is probably further away in 2009 than at any time since the real estate bubble burst.

Copyright 2008 Bill Young. Bill is offering a free, one year course for people who want to know how to quit living pay check to pay check and how to become financially free developing multiple streams of income from real estate and home based business assets. Register here: http://HowtoSolveYourMoneyProblems.Com

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