Thursday, August 5, 2010

Saving The Housing Market

As we head closer to election season there have been new ideas coming from the administration on how to revive the economy.  Over the past two weeks we have heard two that are focused on residential real estate.

A recent financial report released last week showed that there are currently 14.7 million homes that are underwater.  That means they owe more on there mortgage than their home is worth.

The reported also estimated the total amount of debt underwater at $770 billion.

The most recent plan being discussed was to allow debt held by Fannie and Freddie (who own or guarantee the vast portion of mortgages in the country) to pardon the amount of debt currently underwater.  This would bring mortgages to the value the homes are currently worth.

In addition they are discussing plans to take all Fannie and Freddie mortgages down to current interest rates.  Interest rates hit 4.49% this morning, an all time record low, due to both Fannie/Freddie's debt purchases and the anticipation of the Federal Reserve coming back into the market.  (Discussed here.)

The losses on the balance sheet of government owned Fannie and Freddie (the American taxpayer) would be beyond staggering.  Immediate losses would begin at $750 - $1 trillion, and would most likely be far higher due to secondary ripples the moves would create.

The greatest beneficiary would be the Too Big Too Fail (TBTF) banks such as Goldman Sacs, Bank Of America, and JP Morgan. An estimated $2 trillion in impaired assets would be significantly improved.

The government is now essentially run by these TBTF's, as they continue to lead the political contributions every election and collect record bonuses every year as America self destructs.  The ridiculous financial regulation bill that recently passed provides clear indication of who is in charge.

The pain for these actions to "save" housing would be reflected in the value of our currency.

The high paid management staff and traders working for the government sponsored TBTF banks, as well as the incredibly high paid salaried employees of the Federal Government, would have the luxury of protecting their wealth by purchasing gold, silver, oil, agriculture, and foreign currencies.

The real pain would be felt most by the poor and middle class who depend on the purchasing power of our currency because they collect wages, social security, unemployment, or pensions at a fixed rate.

In addition to these housing plans to "save" America, look for another massive round of deficit spending "stimulus" from the Federal Government as we move toward elections.  Along with subsidized low housing payments, the government may provide inefficient government jobs that we do not need (maybe another census count) or just send checks to Americans in the mail.

The correct action would be to allow homeowners to enter foreclosure and rent.  The banks should be forced to write down the losses on their balance sheets and the TBTF banks should fail.

There are close to 9,000 other banks in this country (about 85% of which are healthy and stable) who can continue the banking operations and would be happy to pick up the market share and make loans to homeowners, businesses, and consumers.

This would allow the system to cleanse itself of the bad debt and allow us to once again grow as a country.  Will this ever happen?  No.  The system will cleans itself when the value of our currency revalues itself far, far, lower.  This is the worst possible scenario for the country as a whole.

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