Bush Admin. broadens its own housing rescue program

Following great criticism that it was offering no alternative other than to veto the housing rescue bill which passed the House of Representatives last week, the Bush Administration has expanded its own program which relies on the FHA. From a CNNMoney.com story:

While Congress grapples with how to help troubled homeowners, the Bush administration is expanding a more modest effort to help at-risk borrowers.

The Federal Housing Administration announced changes last week to FHASecure, a program launched in August in response to a housing crisis that threatened as many as 2.2 million borrowers of adjustable rate mortgages (ARMs) with foreclosure.

The changes - the agency's second attempt since April to broaden the scope of FHASecure - underline a debate that is front and center in Washington: What's the best way to rescue borrowers at risk of losing their homes as the nation faces one of the worst housing crises in decades?

The House - led by Democrats and Republicans in states hit hard by foreclosures - passed a contentious foreclosure-prevention package last Thursday that would back as much as $300 billion in mortgages. A key Senate panel could consider the bill as soon as this week, but it faces resistance from Republican lawmakers and a veto threat by President Bush.

At the same time, the FHA on Thursday loosened its rules setting out the criteria that borrowers must meet to obtain an FHA-insured mortgage...

In August, FHA originally said it hoped that FHASecure would refinance 80,000 ARMs for delinquent borrowers who would otherwise likely lose their homes.

But the FHA's own data shows that the program has so far helped fewer than 2,000 of those homeowners.

"The current FHASecure numbers are woefully inadequate," said Jim Carr, chief operating officer of the National Community Reinvestment Coalition, a community advocacy group. "It's not having an impact on the crisis."

The FHA, while acknowledging that it has helped fewer borrowers than it originally intended, says nearly 200,000 have gotten refinanced mortgages under FHASecure...

Until recently, FHASecure was available only to borrowers who fell into delinquency after low, teaser interest rates on their ARMs reset to much higher rates.

In April, the agency announced that it would no longer restrict the program to those borrowers. Instead, all subprime ARM borrowers who were no more than 60 days late - or 30 days late twice in a 12-month period - would be eligible for an FHA-insured loan, as long as the borrower had home equity, or cash, equaling 3% of the mortgage principal.

Also as part of this expansion, borrowers who were three months delinquent or late three times in a 12-month period qualified for FHASecure, but these borrowers needed to have 10% home equity or the cash equivalent. To enable borrowers to reach those loan-to-value ratios, lenders could voluntarily write down balances.

"The changes we have made with FHASecure will help us reach about 500,000 homeowners in total by the end of this year," said Roy Bernardi, the deputy secretary of the Department of Housing and Urban Development, which runs FHA, told the Federal Home Loan Banks Annual Directors Conference on April 29.

In the latest change, the FHA announced on Thursday that it would cover more people by pricing in the risk of default when screening potential borrowers.

Since its birth during the Great Depression, the FHA has charged all borrowers the same rate. Starting in July, the agency would initiate higher insurance premiums for borrowers with riskier credit profiles...

FHA-insured loans, even with insurance premiums, tend to be more reasonably priced than what borrowers would pay otherwise...After the added premiums are folded into the mortgage payment, the difference comes to only about $12 a month for that $150,000 loan...

The timing of the announcement coincided with the House passage of a bill sponsored by Barney Frank, one that takes a much more comprehensive approach to meeting the foreclosure crisis. Critics of the bill, including Bernardi of HUD, charge that it could cost taxpayers billions while the FHASecure program is relatively risk-free...

According to Frank's office, a stronger response to the foreclosure crisis is needed.

"We already acknowledged that there will be increased risk," said Steve Adamske, a Frank spokesman. "But the housing crisis is affecting the entire economy and will prolong any recession. FHASecure has not helped as many people as it needs to."

But will the expansion of FHASecure improve that record?

"It might save a few more borrowers," said Carr. "But in the context of reports of foreclosure filings up 112% this year, representing 600,000 homeowners, it's not nearly as robust as it has to be."

Backlash against housing bailout continues to grow

Ever since the issue of sub-prime and Option ARM loans arose to lead the housing market into its historic crash, I've been asking the simple question, "Why would someone sign something they didn't read or understand?" One common reply is, "Well, not everyone's like you, some people simply relied on their brokers and agents to explain it to them."

Fine. But there's a growing consensus among the anti-bailout crowd that you can't claim to be a responsible adult in the U.S. today and not read what you sign. From a story at CNNMoney:

Why should American taxpayers have to pay to bailout reckless lenders and borrowers?

The website Angryrenter.com, launched just last week, has a vitiation demanding that Congress not pass any bailout programs that reward risky borrowing and lending. To wit: "Let the free market sort it out!"

The petition is gathering 40 to 50 signatures per hour, according to spokesman Adam Brandon, who adds that the site is already getting 15,000 visitors a day...

"A third of the American public rents," Brandon pointed out. "They're saying 'I've been saving for a mortgage for years. I could have jumped in on a subprime loan too. Now I'm going to have to pay for a government bailout."...

Many CNNMoney.com readers agree, expressing outrage at the idea of seeing their taxes used to keep people in homes they never should have purchased...

Many people would prefer the government do nothing at all to prop up the housing market -- especially those hoping to buy in a more affordable market.

Patrick Killelea has been blogging about the housing bubble at Patrick.net for four years from San Francisco, where it takes a not-so-small fortune to buy.

"Bailouts reward bad behavior. I've been diligently saving, denying myself lots of things so I can afford to buy, yet the government is saying we have to keep all these people in their homes," said the Web site programmer and author. "Well, wait a minute! Why can't I spend more than I can afford and have the government bail me out."...

StoptheHousingBailout.com is another newly minted site devoted to the bailout backlash. "I just got really angry," said blogger Morgan Ward Doran, an L.A.-based attorney who isn't professional involved with the housing industry. "Everyone I hear from is against the bailouts."

Doran argues that lenders, brokers and home builders all made huge profits by overbuilding houses pushing through poorly underwriten loans, and now they want taxpayers to cushion their fall.

Indeed, there is a provision in the Senate bailout bill that would give extensive tax breaks to home builders, which has some people especially incensed...

Most people who are against bailouts trust the market more than the government.

The fastest way to return to normalcy is to let the market work, according to Angryrenter.com's Adam Brandon. He acknowledges that the impact on some homeowners will be devastating, but that things will get even more painful if we don't let the free market work its magic.

"I feel terrible for people losing their homes," said Brandon, "but the sooner we let the market sort this out, the sooner we can get back to growth. When the government gets involved, it can delay the inevitable."

IMF warns against possible global recession

Declaring that the housing & mortgage crisis has mushroomed into the worst global financial shock since the Great Depression, the Int'l Monetary Fund is now estimating the chance of a worldwide recession at 25% and hints that governments may have no choice but to bailout banks and borrowers before the situation is solved. From a story at The Guardian found through Patrick.net:

The US mortgage crisis has spiralled into "the largest financial shock since the Great Depression" and there is a one-in-four chance that it will cause a full-blown global recession, the International Monetary Fund warned yesterday.

As finance ministers and central bankers arrived in Washington to discuss ways of tackling the crisis, the IMF warned, in its twice-yearly World Economic Outlook, that governments might be forced to step in with more public bailouts of troubled banks and cash-strapped homeowners before the crisis was over.

"The financial market crisis that erupted in August 2007 has developed into the largest financial shock since the Great Depression, inflicting heavy damage on markets and institutions at the core of the financial system," it said...

With the US sliding into such a recession, there is mounting pessimism about the ability of the rest of the world to escape unscathed. The IMF shaved its forecast for growth in the global economy by half a percentage point, to 3.7% for this year, and by 0.6% - to 3.8% - for 2009.

Although the Washington-based body expects most emerging economies to continue to grow strongly over the next two years, it admits that efforts to tackle the knock-on effects of the credit crunch could be hampered by fast-growing commodity prices. "Inflation has picked up around the globe, mainly reflecting sharp increases in food and energy prices," it said....

However, the IMF said more taxpayers' cash may still need to be spent to unblock the markets. "Given the serious risks coming from sustained financial market dislocations, the recent legislation to provide additional fiscal support for an economy under stress is fully justified, and room may need to be found for some additional support for housing and financial markets."

Simon Johnson, IMF research director, presenting the report in Washington, described such bailouts as an essential "third line of defence", after interest rate and tax cuts, for governments struggling to prevent a deep recession.

He said the main risk to the global economy over the next year was the emergence of a vicious circle, as house prices continued to fall, dealing a fresh blow to the world's banks, and creating a damaging feedback loop...

The IMF's downbeat analysis creates a gloomy backdrop for policymakers arriving in Washington to discuss ways of easing the credit squeeze. Such is the concern about problems in the financial markets that a range of radical options is on the table. These include greater disclosure of losses on sub-prime assets by banks; firmer regulation of credit-rating agencies, and - more controversially - plans for taking some of the risky mortgage-backed assets at the heart of the crisis on to government balance sheets.

A more balanced view on the housing mess

Yesterday I was asked to provide a guest post on the LA Times blog "LA Land" to offer an opposing view to a recent article by Daniel Gross in Slate magazine lambasting the proposed tax break for homebuilders. My point was that it didn't seem fair to punish an entire industry of nearly 5 million workers for the actions of a much more limited number of executives, sales people and lenders who contributed to the housing bubble and, ultimately, the bust.

That post was followed by over 30 comments, most of which blasted me for being naive, stupid, wrong, and all other sorts of things one would expect from a controversial subject (and many of which I've shared today in previous posts on this blog). With that said, however, my own personal view is a bit more balanced, and I submitted that opinion earlier today as a comment to my original post. I've re-printed that comment below:

Hey Peter:

Thanks again for the chance to offer an opposing view yesterday to that of Daniel Gross regarding the proposed tax break for builders (which passed in the Senate but looks unlikely to pass in the House).

You asked me to provide a view in opposition to that of Mr. Gross, and that's exactly what I did, using the same types of defenses I've heard and read from homebuilders and homebuilding association. Plus, I did think that by focusing exclusively on the largest public builders he wasn't necessarily including smaller builders as well as the army of suppliers and subcontractors that do most of the actual building.

I've been keeping a close tab on the comments, and have been re-posting some of the more impressive ones on my own Housing Chronicles blog -- if I'm going to be raked over the coals it's much better coming from those who know how do it!

You've definitely got a smart and well-educated audience (more so than on some other housing blogs I read), with the best comments coming from 'baruza,' 'JohnnyB,' '150 Multiple Choice Questions,' 'arroyo grande' and 'LA,' with the funniest by far coming from 'bottom line.' And whoever 'Brian' is, you sounded so much like my banker friend Brian that I thought it was his post (it wasn't), but what a great comment!

Ok, here's what I REALLY think from a more balanced perspective: from a PR standpoint, many builders have been their own worst enemies, and if they want to re-earn the trust of the general public it simply can't be 'business as usual' anymore.

Firstly, if they want taxpayers to help them through this cash crunch, there should be some strings attached, namely stop avoiding subcontractors and suppliers to whom you owe money and don't insult them with offers of 25 cents on the dollar (which is something I heard last night after my original post).

Secondly, you'll probably have to disband these in-house mortgage operations that in many instances forced buyers to assume loans that weren't competitive so they could grab the incentives being offered. That trust is now lost and unlikely to be regained anytime soon.

Incentives should be offered on their own and not tied to anything else. Beazer Homes, which got into a lot of trouble with their in-house mortgage arm, now refers loans to Countrywide and, according to a design consultant I met the other night, says they don't attach incentives to a Countrywide loan.

Thirdly, they're going to have to provide far greater transparency (and education) throughout the entire sales process, including firing lazy/greedy/uninformed sales agents who were simple order takers during the boom. I can't tell you how frustrated I'd be listening to a sales agent attempt to explain mortgage terms to potential buyers without telling the full story.

Fourthly, we really need to license mortgage agents and brokers, force them to act as fiduciary agents for their borrowers and provide more funds to regulators so they have the muscle to pursue those who deliberately steer clients into the wrong types of loans (such as Option ARMs) because they pay a higher commission.

Fifthly, we've got to recognize that one reason this boom got out of hand was the Bush Administration's 'hands-off' policy towards regulating the housing and mortgage markets; by blindly chasing higher ownership rates they lost sight of just HOW that was happening (i.e., speculators, sub-prime mortgages, fraud, etc.). The fact is we may need some more regulation for this industry and builders may have to accept that if they expect any special treatment by the taxpayers.

Finally, one commentator said that it doesn't matter what the Fed or federal government will do, since this problem is simply too large to contain, and that may be true. The best we can hope for is a somewhat orderly realignment of housing prices against incomes and associated rents, and strict penalties for those who perpetrated fraud on sales contracts and loan documents.

There is still a lot of pain ahead, but for those who keep informed and stay on top of trends, there will be good deals now only now, but certainly in the future. It just depends on your individual circumstances.

Comments from my post at LALand, Part II

More comments from my guest blog post yesterday at LALand:

------------------------------------------------

I thought this one definitely summed it up -

Peter,
After reading the comments all that I could think of was lions, very hungry lions and Patrick Duffy. Did you warn him of what was to come. Will he read the comments.
Thanks for offering the lions a meal. They enjoyed it.

Posted by: dilbert dogbert | April 11, 2008 at 07:28 AM

-----------------------------------------------

On your first point, you are being naive. Many public builders had divisions that were writing mortgages (Centex, and Lennar, for example). If they did not thoroughly investigate the lendees, that is really their problem and they have no excuse.

Also, excuse me if I have no sympathy for the builders on another point - They TURNED THEIR BACK ON THE AMERICAN CONSTRUCTION WORKER. I have spoken to many people who used to make a nice living working construction for houses. Those jobs are now of the 7 dollar an hour variety and are performed nearly exclusively by illegal immigrant labor. Now these American workers don't have the jobs they were skilled at, and the American government gets no income tax from these under-the-table laborers. Oh, and on top of that, all of the board members paid themselves handsomely as well as took generous amounts of stock options. If these companies need help, then they should have a private offering and the well paid board members can reinvest in their dreary business.

Posted by: tony | April 10, 2008 at 06:10 PM

-----------------------------------------------------------

"It’s because of the issues with the credit market that
nonspeculators can’t sell their homes either."

Patrick Duffy makes the argument for "good" vs "bad" builders.
Dumb pity play. It doesn't matter what their motives were,
they were all chasing the inflated price of the market making
higher and higher profits per square foot of building. Now they
simply need to sell the unsold square footage in its traditional
profit range.

The price of building a home between
2000 and 2007 didn't increase much more the
general inflation. If builders chased the price of
land (which many did) then they were taking risks
that weren't prudent. They can now sell for the
actual cost per sq.foot and the actual value of land
and accept no profit or even a loss. Why is this so
difficult to understand? People lose money in
investments, everyday. This is exactly the same
scenario, just on a bigger scale. I say, let all markets
correct and only pour on Fed liquid to put out resulting
fires, not threatened ones. And when the trouble
actually hits, bailout those affected who had no part in
this RE run-up. Let the speculators get on the back
of the line.

Posted by: firesale | April 10, 2008 at 07:43 PM

--------------------------------------------------

We should bail out everybody who has ever made a bad decision, and make it retroactive to, say, the 1960s when a lot of bad decisions were made. The first thing I want is reparations for the useless humanities degree I earned. And I'd like to be bailed out for the countless bad investment decisions I've made over the past 20 years. I mean, why did I ever sell Intel, Dell and Microsoft back when they were in single digits? Why was I forced to do that? It was economic forces beyond my control that brought me to my sorry state. Oh, yeah, I'd like a bailout for yesterday's unfortunate decision to order the chicken marsala instead of the Kobe beef.

Posted by: Zeon | April 11, 2008 at 12:02 PM

--------------------------------------------------

ah, ah, ah BULLSH!T!!!!!!! Duffy calls out all the anti-bailout guys such as Gross for the need to "shoot (sic) from the brain rather than the hip" and states these comments are lacking in "rational discourse". This guy is so arrogant it makes me choke. Who is irrational?

Greed, ignorance, stupidity, any way you paint it, it is still not the obligation of the taxpayer to make up for any one of those pitfalls of private commerce.

And tell me again, how LTCM, the S&L bailout or the airlines are analogous to home builders? How is the failure of the weakest home builders going to create a cascade effect into a downward spiral for the US economy? I don't think so. These home builders can't build and sell any more homes regardless of a bailout.

All this would be doing is moving losses from private industry to ME! I got enough of my own losses, they can keep theirs.

Posted by: pathetic | April 11, 2008 at 12:32 PM

--------------------------------------------------

Funny... I don't remember the home builders paying extra taxes when the sales pace and profits were breaking all previous records. If we're going to give them a tax break now, that should come with a caveat that we get to tax the hell out of them they start feeding a bubble and destabilizing the entire economy. It's only fair.

Posted by: NoWayinLA | April 11, 2008 at 02:40 PM

-------------------------------------------------

Mr Duffy, to use a basketball term, you need to come strong in this house. That was some weak "stuff" you brought in here and predictably you are getting it swatted back in your face.

Posted by: Digitalian | April 11, 2008 at 09:49 AM

--------------------------------------------------

I did, however, get one comment in support:

"It’s because of the issues with the credit market that nonspeculators can’t sell their homes either..." Patrick is right about this. The market stopped dead in August because lenders stopped making loans. Now that lending has picked up somewhat, so has sales activity.

There is a simple reason why builders build homes: consumer demand. Whether those consumers are flippers or not, and even if the reasons for the demand weren't sound, there is no denying that there has been a huge demand, fed by easy credit, that has lead to lots of new homes.

Posted by: sfvrealestate | April 11, 2008 at 11:36 AM

Senate housing bill passes but expect the House version to be different

Although the Senate passed a bill yesterday to help prop up the housing market, experts say to expect significant changes in the House version still being debated. Whereas the Senate bill focuses more on builders and lenders but not homeowners (i.e., supply side), the House version takes an opposite tack. From a AP via MSNBC story:

The Senate on Thursday passed a bipartisan package of tax breaks and other steps designed to help businesses and homeowners weather the housing crisis.

The measure passed by an impressive 84-12 vote, but even its supporters acknowledge it’s tilted too much in favor of businesses such as home builders and does little to help borrowers at risk of losing their homes.

The plan combines large tax breaks for homebuilders and a $7,000 tax credit for people who buy foreclosed properties, as well as $4 billion in grants for communities to buy and fix up abandoned homes.

The measure, titled the Foreclosure Prevention Act, will be significantly redrawn by House critics who say it favors businesses such as home builders instead of borrowers...

Democrats failed to win approval of ideas such as giving people threatened with losing their homes the right to seek more favorable loan terms from their lenders in bankruptcy courts. At the same time, a proposal to have the government back up refinanced loans for people facing foreclosure has yet to win GOP support.

The White House opposes the plan but has not issued an explicit veto threat. It says parts of the legislation would make the problem worse by depressing some home values, and that the measure inappropriately uses taxpayer money to bail out lenders saddled with foreclosed houses.

The House is likely to reject key portions of the Senate measure, including $25 billion over three years in tax breaks for money-losing businesses such as home builders. A plan adopted Wednesday by a key House panel dropped that idea as well as the tax credit for purchasers of foreclosed homes...

The $25 billion tax break the plan offers to homebuilders and other businesses absorbing heavy losses and the energy tax package were both dropped from an economic rescue plan enacted in February. Critics of those proposals said they were overly expensive and would not stimulate the economy.

But deepening public worries about the housing crisis appear to have emboldened lawmakers to swell the $9 trillion deficit to pay for the measures.

The $7,000 tax credit for the purchase of foreclosed homes, opponents argue, would unfairly reward purchases that would have happened anyway while possibly devaluing other homes. It also could give banks an incentive to foreclose on homes by subsidizing purchases of such properties...

A House bill takes a far different tack, steering tax breaks toward first-time home-buyers and investors in low-income rental housing. The measure is likely to be paired with a broader housing rescue package being drafted by Rep. Barney Frank, D-Mass., the Financial Services Committee chairman, that would have the FHA step in to back $300 billion in refinanced loans for 1 million or more homeowners who otherwise might face foreclosure.

Under a similar plan by Dodd, the FHA would insure up to $400 billion in loans.

The Bush administration countered those plans Wednesday with its own, far narrower, proposal. It would expand an existing FHA program to allow more homeowners who are facing large rate hikes to refinance into more affordable government-insured loans.

My guest blog post over at L.A.Land

I received a great invitation this morning by blogger & journalist Peter Viles, who runs the L.A. Land blog for the Los Angeles Times' website (and which I understand has become the hottest blog for that paper).

Thank you, Peter, for the opportunity! For those of you not familiar with Peter's blog, it's quickly become one of my daily must-reads for stories I might otherwise miss and from which I now frequently quote.

From Peter's intro:

This blog has been teeing off on the proposed tax break for homebuilders, and this morning I gave the blog over to Daniel Gross' rant that the tax break is "perverse" and "absurd.I thought it only fair to invite someone from the other side of the debate to weigh in. That said, here is guest blogger Patrick Duffy, who blogs at HousingChronicles.com.

Click here for the post at LALand.

It'll be very interesting to see what kind of comments (and tomato-throwing) I get. I may also re-print some of the more odious comments over the next day or two.

Here's the post in full, but I'd suggest checking in first with LALand so you get the entire back story first:

While I can understand and sympathize with bloggers, readers and journalists such as Daniel Gross who remain adamantly opposed to any alleged special treatment of homebuilders at potential taxpayer expense, such emotionally wrought arguments conveniently ignore both rational discourse and historical precedent.

Firstly, the argument that all builders overbuilt to simply assuage their own greed is simply inaccurate (some did, most didn’t). In fact, according to Paul Emrath at the NAHB, most builders were trying to meet an artificial demand created by speculators who were lying to sales agents, lying on sales contracts and lying on mortgage applications. No matter how many safeguards they put in place to clamp down on speculative activity – borne out of a similar scenario in the late 1980s when flipping houses in between phases became a new sport – speculators knew that builders weren’t really in the business to enforce such contractual provisions, so they took the risk anyway. And other than a few lonely voices in the blogosphere, the conventional wisdom at cocktail parties was that such activity was a sure-fire way to build long-term wealth. Lesson learned: never trust people drunk on either alcohol or their own supposed genius.

Secondly, if we simply had speculators leaving the scene and dumping their existing inventory onto the market, we wouldn’t be seeing the 60% reduction in building activity that we have today. It’s because of the issues with the credit market that non-speculators can’t sell their homes either, which is a serious handicap in a country that was built on freedom of movement in between job opportunities.

Thirdly, even before the Fed-supported Bear Stearns buyout, this country had a long-standing policy of propping up industries when the risks to the economy outweigh those clucking on about ‘moral hazards,’ which seems a specious argument considering the chronic epidemic of morally questionable behavior of Wall Street, pop culture and U.S. politics in general. Remember September 2001, when Congress approved $15 billion in aid to the airlines? Or the $3.6 billion for Long Term Capital Management in 1998, the $4.5 the FDIC provided for Continental Illinois in 1984 or the $1.5 billion in loan guarantees for Chrysler in 1980? Where was the outrage then? Although there was plenty of outrage accompanying the $124 billion bail-out of S&Ls during 1986-1995, the potential consequences of doing nothing were far more serious.

Fourthly, in his piece “A Tax Break for Bubble Heads” in the online Slate magazine, Daniel Gross’ opinionated rantings run a bit loose with the facts. By only considering the financial strength of large builders such as Lennar or Pulte, he completely dismisses the fates of the tens of thousands of builders and remodelers who can’t, as he says, ‘look to the capital markets first’ and can’t ‘dilute the shareholders, not the taxpayers.’ In fact, according to the most recent Builder 100 ranking in 2006, nearly three-quarters of homes sold that year were not built by big public builders, but a variety of small and large private companies, to whom the capital markets are now largely closed. Today you see multi-generational homebuilders closing their doors not due to greed, but due to market forces beyond their control. At risk? Nearly five million jobs or 3.5% of the U.S. workforce related to residential construction, filled by people who had no say in how the large public builders ran their businesses. From his comfortable writer’s perch, however, Mr. Gross would simply label that ‘market capitalism.’ I wonder if he repeated that same phrase to the group of long-time Newsweek writers recently forced to take a buyout and leave?

Finally, this tax break oriented towards homebuilders is in theory available to any company facing current financial losses after years of profits, and had been done before as part of an economic stimulus package enacted by Congress in March 2002 to address fall-out from the attacks of 9/11/01, giving innocent companies – such as the country’s 155,000 building industry suppliers and the 58,000 homebuilders not in the top 10 – some much-needed breathing room to stick around for the eventual rebound. In fact, perhaps Mr. Gross should take a hiatus from his writing duties and work for that fictitious builder of affordable housing he cites in Wichita. Such an experience would likely help him start shooting from his brain instead of his hip.

Various fixes to the subprime mess

Although the recent legislation in Congress has been getting the most attention recently, others have floated some even more creative ways to fix the subprime market debacle. From a CNNMoney story:

First, tweaking the bankruptcy code:

Judges already have the power to shrink or vaporize many debts, like credit card balances and mortgages on investment properties. This idea, supported by Sens. Richard Durbin (D-Ill.) and Christopher Dodd (D-Conn.), would let judges reduce primary home loans as well.

The pros: The plan could save hundreds of thousands of people from foreclosure without costing taxpayers anything, say consumer advocates. And it's a minor change, so it could happen fast.

The cons: The Mortgage Bankers Association says its members would have to raise rates on all home loans by as much as 1.5 percentage points to compensate for the risk of court-imposed losses.

Next, introduce fixed-price housing that can't rise (or fall) over time:

John H. Vogel, a real estate economist at Dartmouth College, has a plan he says cures both the mortgage market and housing affordability. He proposes that the government buy up the mortgages of troubled borrowers and give them smaller mortgages, reflecting the drop in real estate values. The catch: The price of those houses would be forever fixed at their new loan amount.

The pros: The program could produce as many as 2 million affordable homes. Of course, owners wouldn't be able to profit in future housing booms. But they'd get a house at below-market prices.

The cons: Living next to a house that never goes up in value could decrease the value of your house as well. Buying up all the houses from the banks could cost as much as $200 billion. (In time, much of that would get paid back by borrowers.)

Create 'negative amortization instruments:'

The Office of Thrift Supervision (OTS) proposes creating negative amortization certificates (NACs). Say a bank agrees to write down a $250,000 mortgage to $200,000, relieving a borrower of $50,000 in debt. The government will then issue the lender NACs worth $50,000. When the homeowner sells, the first $50,000 in profit goes to repay the NAC. Anything above that, the seller keeps. If the home goes for less than $250,000, the bank gets all of the profits and the NAC disappears.

The pros: Banks would be more willing to cut borrowers a break because they would get an asset for doing so. Homeowners would get part of their debt relieved, a more affordable mortgage and the reduced risk of owing money when they sell the house.

The cons: If owners knew banks had first claims on profits, they'd have less incentive to renovate or maintain their homes. NACs would be hard to value - and the last thing we need is another hard-to-understand financial instrument.

A not-so-under-the-radar bailout (thanks to bloggers who continue to discuss it):

The Federal Reserve effectively buys up bad mortgage debt from banks (it has already started to do that by accepting impaired assets as collateral for loans to financial institutions). Struggling banks get cash from the government to keep them afloat.

The pros: Politicians could say they didn't bail anyone out even when they did. A cash infusion means banks could lend freely again. Mortgage rates should fall. That should bring more buyers into the market, slowing the drop in prices.

The cons: Taxpayers would foot the bill, which could run as high as $300 billion. Some borrowers could refinance, but many would lose their homes. That means more foreclosures. Real estate prices, while helped by cheaper financing, would probably still fall. But hey, score one for personal responsibility, making people bear the consequences of their mistakes - as long as they're homeowners and not financial executives.

That's because financial executives donate large sums to political campaigns -- yet another civics lesson about our broken system.

Bailing out the undeserving sometimes necessary

There's an excellent article by Peter Gosselin in today's L.A. Times on the question of a mortgage bailout that would likely aid the undeserving. I've been predicting a federal bailout since the beginning of the year because although it may not be the economically 'fair' thing to do, the reality of politics tell a much different story (call me a cynic if you must).

In fact, the U.S. has a long history of bailing out a few of the guilty when the costs of doing nothing punishes everyone, and this is something which many armchair bloggers and commentors have yet to appreciate. Stomping one's feet and yelling, "No Bailout!" simply isn't going to work unless it's accompanied by a rational discourse on the harm that would be caused (i.e., artifically high housing prices, higher borrowing costs in the future, etc.). Is it 'unfair' to those who didn't participate in the greed that led to the mess? Absolutely. But whoever said life was fair? Just look to history (from the article):

The House and Senate are beginning to consider proposals for federal intervention on a massive scale. In effect, the government would take over many of the risks now borne by lenders, borrowers and investors -- offering to revamp and then guarantee about 1 million troubled mortgages in an effort to shore up plunging home prices.

The change would come in two stages. The first would be the likely passage Tuesday of a modest bipartisan housing aid package in the Senate.

Next would come action over a period of months on measures to guarantee $300 billion or more in revamped mortgages...

The proposals also are likely to raise the ire of mortgage industry lobbyists and investors in mortgage-backed securities, who want any effort to ease the crisis to be voluntary and small scale.

Nevertheless, calls for passage of one of the measures or something similarly sweeping are growing increasingly insistent as lawmakers and many economists conclude that something must be done to end the real estate price plunge quickly if the economy is to right itself.

And, contrary to what many Americans may think, government action on such a dramatic scale would not be new or even all that unusual. Washington has taken similar-size steps during economic crises of the past.

Repeatedly in the nation's history, from the savings and loan scandal of the 1980s to the Depression of the 1930s and the financial panics of the 18th and 19th centuries, Washington has stepped in when large numbers of ordinary citizens were threatened with financial devastation...

In almost every instance, action came only after long, agonized debate, particularly over the question of whether the beneficiaries of government action were in trouble through no fault of their own.

And in almost every instance, a simple calculation tipped the balance in favor of action: Although some who were undeserving might end up being helped along the way, the benefit to society as a whole was simply too substantial to ignore...

The S&L industry had gone on a lending rampage, but most of its bets had gone bad. The government seized the assets of 1,000 S&Ls, sold off half a trillion dollars' worth of property and spent $124 billion of taxpayer money paying deposit insurance to the institutions' customers, as well as aiding those few institutions that were considered salvageable.

Many depositors were ordinary people whose life savings were threatened. But others were speculators who simply made bad investment decisions -- often with the assistance of S&L executives.

The government set aside the question of who was deserving of aid, deciding that leaving it to market forces to work through the problem would have hurt many innocent savers and been a long-term drag on the economy...

During the late 18th and 19th centuries, Congress passed four major bankruptcy laws in the wake of financial panics. In each case, the measure released debtors -- deserving or otherwise -- from some of their obligations so they could get back on their feet and become productive members of society again.

In the 1790s, the newly formed federal government finally decided to pay off most of the debts accumulated by the states during the Revolutionary War, despite complaints that speculators in war bonds would benefit.

Distasteful as many found it, paying off the debts was deemed crucial to establishing the new government's credit at home and abroad.

A similar decision-making process appears to be underway in the current housing crisis...

Across the political spectrum, the consensus is that Washington has done little to help ordinary Americans affected by the entwined housing and financial crises...But pressured by the Fed's aid to financial players, the demands of economically strapped voters and the sense that key lawmakers may have come up with a way to parry the deserving/undeserving distinction, Congress is about to take up proposals that could greatly expand the scope of federal action...

Under similar proposals by Frank and Dodd, Washington would empower another New Deal-era agency, the Federal Housing Administration, to run a new mortgage guarantee program. Dodd is chairman of the Senate Banking Committee.

To participate, the lender would have to cut the principal of a troubled mortgage to 85% of a home's current, diminished market value. The FHA would take 5% of the new, lower amount as a fee. Homeowners would get the remaining 10% as equity to give them a stake in paying off the renegotiated mortgage.

Borrowers would have to prove that they had the financial wherewithal to keep up with the now-lower monthly mortgage payments. Those who couldn't prove they could pay would be ineligible for the program. If borrowers failed to pay the new, smaller mortgage, Washington would do so.

There were hints last week that by making the proposed program voluntary, having the government guarantee but not actually buy up houses or mortgages, and by slapping requirements on both lenders and borrowers, the proposal could fly politically.

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?

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.