The Wall Street Journal reported (http://online.wsj.com/article/SB123867739560682309.html) that on April 2 the FASB eased mark-to-market accounting rules that might adversely affect the book values of some collateralized debt securities, including mortgage securities, on the books of banks and other investors.  Congress pushed hard for the FASB to do this, hoping it would improve capitalizations of banks and reduce losses at other companies holding devalued debt securities ("toxic" assets) by allowing them to reduce previous writeoffs or to avoid some additional writeoffs.  Some critics, mainly stock and bond investors, think it will make accountings by the companies less transparent or definitive.  Other critics think it might reduce the possible success of the forthcoming Public-Private Investment Partnership (PPIP) recently announced by Secretary of the Treasury Tim Geithner, who hopes it will help get "toxic" assets off the books of the big banks, including Citigroup, Bank of America, Wells Fargo and PNC Bank.

We think that on balance this step alone will help thaw the lending paralysis at some large banks by improving their regulatory capital, and possibly by improving market values and market liquidity of the toxic securities.  Ahead of the ruling, on March 25 The New York Post reported that according to bond traders (http://www.nypost.com/seven/03252009/business/double_dippers_161157.htm) that Citigroup and Bank of America were recently outbidding the market for large volumes of AAA-rated mortgage securities at about 30 cents on the dollar, so it appears the big banks agree with us, although we question the propriety of those companies using TARP funds to buy securities that the government will be using additional tax money to help get them off their books.  

The S&P Case-Shiller Indices for data through December, 2008 were released on February 24.  The U.S. national index showed a record decline of 18.2% year over year.  From the peak in August, 2006 national home prices are down an average of 26.7%.  The declines occurred broadly in almost all areas of the country.  Regarding the 20 metro areas tracked in one index, "Eighteen of the 20 metro areas are in double digit declines from their peaks, with half of the MSA’s ["metropolitan statistical areas"] posting declines of greater than 20% and four of those (Las Vegas, Miami, Phoenix and San Francisco) in excess of 40%."  No relief in sight.  The prospect for massive numbers of owners walking away from their mortgages is alarming.  That would be a tremendous blow to the banking system, probably way worse than what has been recognized to date on bank balance sheets.  The federal government had better do something soon to shift debt from mortgages to non-secured loans to prevent the situation from getting completely and irreversibly out of hand.  We recommend The AllStreets Bailout Plan, or any plan very much like it.

There was a very informative article on Greenfaucet (investment site) by Michael Pento on February 10 The Reality Behind Real Estate.  It's a good review of the status of some of the most important variables that affect housing values such as inventory, foreclosures, sales, homes built, etc.  It isn't terribly optimistic about prices bottoming yet, but says the groundwork for a bottom is falling into place.  The review is like so many others that view this housing cycle as similar to the others of the last fifty years.  Regrettably, it isn't gong to be at all like the others for so many big reasons.  One very significant factor that he missed is the huge number of owners who are upside down, now approaching 25%.  Since about 50% of home purchases and sales traditionally have been by move-up buyers, that knocks out a huge part of potential demand for years to come in absence of a government program to relieve excess housing debt such as The AllStreets Bailout Plan.  The other major variables he doesn't mention are the huge drop in the number of qualified buyers due to the drastic elimination of mortgage loan types and the difficulty of getting mortgage insurance, and the demographic megatrend that will keep providing more supply from retirees and dying boomer parents than demand from new buyers from younger ranks for years to come.  I'd rather be more optimistic, but the facts just don't support being that.

S&P/Case-Shiller Home Price Index (trademark Fiserve, Inc.)

Here's the most recent data released 1/27/09 for November, 2008 prices: SP Case-Shiller Index of Home Prices (TM Fiserve, Inc.) for November, 2008 Prices.  Home prices in the 10 largest cities are down 19.1% from their August, 2006 peaks, and the prices in the 20 largest metropolitan areas are down 18.%.

On Balance:

Those who expect or hope for a significant recovery in residential housing values any time soon will most likely be very disappointed.  Largely irreversible factors have been both causes and consequences of the housing slide, namely, a withdrawal of easy mortgage credit, and impairment of lender balance sheets.  In addition, another irreversible factor, adverse demographic trends, will likely keep housing prices low for many years.  In addition, the homeownership rate reached a record high of 69% of households in 2006.  The higher the portion of households that already own a home, the smaller the pool of qualified propsective buyers.  It will take an unknown period of time to build up the pool of buyers.  Last, but not least, is the fact that there is no economic megatrend in sight that is comparable to the computer and internet revolution to drive vigorous long term economic growth and support higher incomes.  It's possible that the current crises can be stabilized quickly with a large scale federal government loan program such as the All Streets Bailout combined with a protracted period of low mortgage rates.  If the program succeeded in stopping the housing downturn and reversing the economic downturn, housing values might return to a more normal gradual long term inflation path, but it wouldn't be anything sudden or dramatic.  Properly conceived loans can rescue borrowers and lenders from excessively leveraged properties, or prevent them from becoming over leveraged due to additional loss of values, and can shore up demand by replacing some important loan programs that have vacated the free market.

Favorable Factors:
   
    Interest Rates:  Short-term interest rates of all types are very low, so there's little room for significant reduction.  A significant question is whether that lower mortgage rates.  For the past several months the spread between mortgage rates and comparable interest rates in the banking system have been at historic high levels.  So, for example, for several years until recently one could accurately estimate the par wholesale rate on a conforming Agency 30-year fixed mortgage as being about 1.5% added to the yield on 10-year U.S. Treasury Notes.  So, during the early 2000's with the 10-year note hitting 3.5% on several occasions, the par for 30-year fixed rate mortgages bottomed at about 5.00%.  As of 1/2/09 Now, with the 10-year notes yielding 2.46%, the par 30-year fixed rate is right at 5.00%, which is a spread of 2.66%; that spread has been in force for several months.  If the previous spread existing now, the par 30-year fixed rate would be 4%!  One guesses that the mortgage market thinks the yields on U.S. Treasury securities will be increasing substantially in the near future, or the new risk premium will persist until the market is convinced all interest rates will be low for a long time.

It's possible that the par 30-year mortgage rate could stay near 5% for a long time if there's no dramatic economic recovery (most likely incur view).  However, if the economy continues to worsen, or if short rates stay low for whatever reasons, and the mortgage market begins to take a different view of the risk premium, 3.5-4.5% 30-year fixed mortgage rates would not be out of the question (that's what prevailed in the 1950's.)  On December 16, 2008 when U.S. Treasury bonds peaked in price and bottomed in yield, we actually observed one wholesale lender price the 30-year fixed rate at 4.5% better than par.

All interest rates should continue to be low, with fluctuations, of course, until a substantial economic and housing recovery can be clearly anticipated.  That could take a long time unless Congress takes dramatic action to stem the many crises that have developed, with mortgage alleviation as the focus, such as our All Streets bailout plan.  Rates remained low for a prolonged period in 2002-2005, until a modest economic recovery had developed and a housing boom was apparent in 2005.  Then short rates increased from 0.8% to 5.3% in two years.  Circumstances are very different this time around.  Even with reasonably low mortgage rates we think it's unlikely there will be any housing boom or economic boom.  So even with a bailout, rates could remain relatively low for a long time.  

   Lower Housing Prices:   There is a point at which housing prices become low enough to balance supply and demand.  One hopes we are close to that point, however, there's no evidence of that yet, and, given continued adverse economic and credit trends the number of qualified buyers (demand) will keep shrinking and excess inventory will continue due to foreclosures and short sales.

   Federal Economic Stimulus Plan of January, 2009:
The plan includes a tax credit of $8,000 for a first time homebuyer purchasing a home.  That will provide a new incentive for some to enter the market, however, we don't rate it as an overwhelming one since it will only affect a small number or new buyers, and $8,000 isn't a lot when you consider that many home prices have dropped that much in one to three months.

   Homeowner Affordatility and Stability Plan:
That's the plan announced February 18, 2009 by the U.S. Treasury and President Obama.  We rate this as being very ineffective in stopping the housing collapse or supporting prices.  It will help very few who are upside down owners, the main problem in the market.  It won't help at all anybody with a jumbo mortgage, second home or investment property.  It might stop or delay some foreclosures.  It will have little or no effect to create or encourage future demand.  We have detailed comments in our article about the plan About the New Homeowner Affordability and Stability Plan.

    All Streets Bailout:  A program like the one we advocate to relieve consumer mortgage debt and provide comparable benefits to non-owners would be a huge positive factor that would operate quickly over a period of one or two years.  We believe it would stabilize the economy and return it to a growth path.  (See summary on our website The AllStreets Bailout Plan, and more details on this blog.) 

Unfavorable Factors:

   Shrinkage in Available Mortgage Credit:  Since the slide in residential housing values began in early 2007, there has been a radical shrinkage in the availability of mortgage credit, which has paralyzed refinances and reduced the pool of qualified buyers, due to the following factors:

1. major reduction in the variety of the types of loan programs available,
2. pronounced tightening of lending standards for most remaining loan programs (except FHA, VA, USDA Rural Development, which, however, all have fairly low loan limits; the temporary increase in FHA loan limits hasn't worked),
3. increases in mortgage rates (especially for ARMs); the large rise in short-term interest rates in 2005-2007 magnified the initial subprime ARM crisis that started in 2006 due to mortgage rate resets; the resulting series of financial crises has caused huge record spreads between mortgage rates and government security rates, by at least 2% for most types of mortgages,
4. increases in the price of any given rate due to new or stiffer pricing charges for various characteristics of loans (credit score, LTV, subordinate financing, investment property, etc.),
5. drastic reduction in the number of brokers and wholesale lenders, about 300 major lenders out of about 1200 at the end of 2006 (more about this at a very popular website, The Mortgage Lender Implode-O-Meter, at http://ml-implode.com/).

The available selection of mortgages is now almost as limited as any time since Fannie Mae and Freddie Mac were converted to government sponsored enterprises ("GSE"S") in 1968 and 1970, respectively (Fannie was actually created in 1938 as a government agency but was converted to a GSE in 1968; for a brief article about them click http://hnn.us/articles/1849.html).  The list of readily available programs has shrunk down to almost nothing other than conventional mortgages insurable by Fannie or Freddie (these are known as "agency" mortgages or "conventional" loans), FHA, VA and USDA Rural Development, and home equity loans or lines of credit at no more than 80% loan-to-value ("LTV").  There has been a  virtual elimination of entire segments of mortgage loan programs:

• Subprime loans are practically gone (many are cheering).  There are very few lenders left, and remaining loans have mostly high fixed rates, only reasonable at low LTV's and with higher credit ratings.  Investors in subprime mortgage securities scarce or non-existent.  Contrary to popular belief, subprime stated income loans required documentation of employment, and a check by the underwriter of probable income via public salary data for various types of jobs.  Even stated income loans required documentation of debts, real estate owned, and assets, if needed to qualify (usually a couple of months of housing expenses in liquid reserves).  Regrettably, many borrowers with prime credit used these easier-to-get subprime ARM loans to speculate on property values.  If subprime loans ever come back, they should be subject to regulation along the lines recommended in the article in our blog.
• Alt-A loan programs pretty much eliminated from offerings by most sources, or carry prohibitive rates.  This category included loans with "stated income," "no ratio" and "no doc" processing, and up to 100% financing programs, including second mortgages and lines of credit.  This was a major source of lending for those with good to excellent credit histories and credit scores, but either didn't meet the much more stringent requirements for Fannie and Freddie loans, or didn't wish to document income (stated income), or didn't meet strict debt ratios (no ratio loans), or didn't wish to document income, employment or assets ("no doc").  Contrary to public belief, these "low documentation" types of loans were restricted in loan-to-value, and required much better credit than full documentation loans.  This category might revive to some extent at the point when investors have confidence that housing values have stopped falling.
• Home equity loans and lines of credit for more than 80% total loan-to-value.
• "Portfolio" loans;  these are loans of any type that are unique to a particular lender, intended to be held by that lender instead of being sold to an investor; there used to be a fairly large universe of such loans, and they usually had more relaxed guidelines and sometimes unique features compared to "agency" loans.  Now there are very few lenders still offering their own portfolio loans.  
• Loans for investment properties; these are greatly restricted as to the types of loans available, loan to value, and carry stiff rate pricing "hits."  Investment purchases could represent an important source of housing demand in the upcoming adverse demographic environment, but the available loan programs will need to expand significantly to open it up.
• Low documentation loans of any kind.  Many blame such loans for the housing debacle, but they have served well a very significant portion of the populace for a long time.  Lenders knew how to set guidelines and rates to maintain acceptable levels of risk based on historical performance levels, but that didn't take into account a once-in-a-century implosion of the housing values due to a unique combination of factors, and neither did guidelines for any other types of loan programs.

    Shrinkage in Pool of Qualified Borrowers:  Taken together the loss of loan programs and tightening of lending standards alone means that probably no more than about 50% of potential borrowers who would have qualified at the end of 2006 are now qualified for a mortgage.  It's unlikely that easy qualification guidelines will return for many years, if ever.  In addition, a very significant proportion of borrowers who would otherwise qualify for loans are upside-down on their property (mortgage principal totals more than it's worth) and, therefore, can't refinance or move without a short sale, so they are effectively no longer prospective buyers unless their property value recovers enough to pay off the mortgage(s).  Based on estimates for September, 2006 and subsequent drops in property values at least 25% of all U.S. residential properties are now either upside down or have no equity (article in Business Week).

A further stubborn problem on the consumer side preventing any rapid recovery in the pool of qualified buyers, is the weak condition of consumer balance sheets.  The asset side of consumer balance sheets has dramatically collapsed.  In just several months, housing equity has disappeared and the value of any stock investments have collapsed dramatically.  On the debt side, obviously consumers have too much mortgage debt.  But they also have too much auto, credit card, and student loan debt.  So even if there wasn't an economic collapse in progress, it would take a few years for consumers to pay down debt enough to begin making large purchases.  The income statement doesn't look promising either.  With the collapse of employment opportunities, and the likely drop in wages, that makes it even harder for consumers in aggregate to reestablish enough net worth to drive a housing recovery.

The drastic shrinkage of the pool of qualified borrowers is the main reason the housing slide has been so dramatic and persistent, and housing values cannot recover quickly.  As housing values declined credit availability shrank, and that put more pressure on housing values, etc.  The outlook for recovery in the values of residential housing is extremely poor as long as so many borrowers are now shut out of the market for loans.  Unfortunately, it's unlikely that any of the factors that shrunk credit will reverse in the foreseeable future.  Those who expect any significant rebound in values any time soon will be very disappointed.  The housing values will flounder for at least several years awaiting a sufficient combination of reduced inventory and a replenished pool of qualified borrowers via improved consumer credit qualification or higher incomes, or restored diversity in loan programs or population growth.  At a minimum it would be necessary for inflation (if any!) to restore the values of homes enough to enable owners to refinance or move without losses.  But inflation might be very scarce in absence of vigorous economic recovery.  

    Adverse Demographic Trends:  Another big strike against the prospect for significant recovery in housing demand or values in the near futures the aging of the population and the expected forthcoming reduction in the ratio of workers to retirees for several years.  A growing proportion of the populace is older and retired.  Retired folks are more likely to sell and downsize than to purchase or upgrade.  Furthermore, there isn't enough increase in the number of young working families who qualify for mortgages to absorb the sales of properties by retirees.  The worker to retiree ratio will continue to shrink for many years.  Another problems is that most of the folks who qualify to finance a property already own one or more.  One of the reasons the housing market turned, is that so many households already owned a home and were not interested in buying or upgrading.  According to the census bureau, home ownership reached a record high of 67.3% in 2006.  When almost everybody who is able owns something, at some critical point there aren't enough qualified buyers left to maintain a sellers market and keep prices high.

This moment in history is unlike any other in the last seventy years.  The dynamic factors that permitted housing recoveries in every cycle since the 1950's simply don't exist.  Since it's so unlikely that there can be any significant recovery in housing values due to normal economic processes, in order to stabilize the economy it's essential to relieve a significant portion of excess mortgage debt to restore a measure of health to both consumers and lenders.  We think the best dramatic solution is one such as our All Streets bailout plan.  Even if it wouldn't necessarily restore housing values, at least it should stop the slide and replace lost home equity with long term low interest loans that can give the economy and housing more time and a better chance to mend without a catastrophic collapse.

    Adverse Economic Megatrends:  In the period of 1950-1998 the population explosion of the baby boom combined with explosive technological progress (microchip, computers, software, biotech and internet) drove a megatrend of economic growth and increasing productivity.  There is precious little on the horizon to drive underlying economic growth or productivity in a similar manner.  The next ten years at least will be more or less a maintenance economy as the demographic changes play out and the economy waits significant technological developments.  We can think of only two major factors that might be significant: the generational transfer of wealth from baby boom parents to their heirs, which might help restore savings and investment levels, and the inevitable general increase in energy prices that could form a rising baseline for technological investment.  Regarding oil prices, we think the current collapse may be directly analogous to what happened to the stock market in the early seventies leading up to the 1987 "crash."  Then, in a five year period the stock market had decisively broken out of a 20 year trading range and rocketed up by a factor of 400% or so.  Then it crashed back slightly below the top of the range.  From there it rallied for twelve years and went up by a factor of 10 or so.  Oil made a similar move, rallying from the $15-35/barrel range to 147, about seven hundred percent in five years.  Recently it touched $35/barrel, and has since rallied to $47.  We think that it will slowly rally for several years and then spike to a top near $350.  Of course, by then there could be a general increase in price levels so that $350 wouldn't be all that remarkable.

-END-

On Februay 18 President Obama and the U.S. Treasury announced another new plan to slow housing foreclosures (U.S. Treasury Fact Sheet).   The faact sheet states that the "Homeowner Affordability and Stability Plan will offer assistance to as many as 7 to 9 million homeowners making a good-faith effort to stay current on their mortgage payments...it will target support to the working homeowners who have made every possible effort to stay current on their mortgage payments." 

The Treasury's new plan will only help owner-occupied primary residences (no vacation homes or investment properties..."speculators and house flippers" in the words of the fact sheet).  There's a total of  about 108 million residential 1- 4 unit properties and condos that qualify for some type of residential mortgage.  Of all residential properties about 25% now have zero or negative equity, so there are about 27 million properties in trouble.  There are about 75 million owner-occupied homes of which 31% have no mortgage at all.  So the plan deals with no more than 34 million owner-occupied homes that have a mortgage (some of the owner-occupied properties are second homes which are not included in the rescue plan).  If you assume that 25% of all the owner-occupied homes have zero or negative equity, that means there are about 19 million owner-occupied properties in trouble.  If the plan only helps 7 to 9 million owners then by the Treasury's own analysis the plan will leave out 18 to 20 million properties in trouble, about 10-12 million homeowners that are in trouble and from any assistance, 56 million owner residences that aren't in trouble, and all 33 million properties owned by investors, of which we might assume there are 25% or 6-8 million in trouble.  We also note that there are no compulsory provisions for any element of the plan.  It's another wing and a prayer.  So the plan might help 7 to 9 million homeowners, if the lenders decide to help.  The plan doesn not reduce the mortgage principal of any loan, and that's the main failure of the plan, since the problem of upside down mortgages is the main problem in the banking system and in the consumer segment of the economy.

One phase of the Plan is supposed to help borrowers refinance if they have loans owned or insured by either Fannie Mae or Freddie Mac ("Agency" or "GSE" loans) to refinance to lower interest rates.  "...a new program that will provide the opportunity for 4 to 5 million responsible homeowners who took out conforming loans owned or guaranteed by Freddie Mac and Fannie Mae to refinance through the two institutions over time."  Treasury gives no further details at all about this phase of the plan, so it's impossible to determine just who qualifies, and when, or how it might benefit them.  It could be the most important part of the plan for the prime credit segment of homeowners, since the biggest problem for many is being upside down so not qualifying to refinance or move without a loss, even if they qualify for refinances given their debt ratios.  Due to the lack of detail, especially compared to the detail given of the second phase of the plan, we strongly suspect this part of the plan is a Trojan horse designed to elicit public support.  The phrase "over time" also makes one suspicious that the pot of gold at the end of the reinbow might just keep receding toward the horizon.

Another major part of the plan is called the "Homeowner Stability Initiative" and is designed to help 3-4 million borrowers of non-Agency loans (subprime, Alt-A, option ARMs, perhaps second mortgages).  Borrowers qualify if they are either underwater or have a high debt-to-income ratio; delinquency is not required.  $75 billion of TARP funds are dedicated to this cause.  It provides interest rate reductions partly subsidized by taxpayer funds.  The fact sheet comments that "This initiative will go solely to supporting responsible homeowners willing to make payments to stay in their home – it will not aid speculators or house flippers."  [underlining and italic emphasis by Treasury not us]  This plan will reduce the interest rate for qualified individuals so that their payment is 31% of their qualifying income.  The lender voluntarily reduces the payment to 38% of income first, and then the Treasury subsidizes the reduction to 31%, however, in no case will the rate be less than 2%!.  A disqualification that may operate all too often is given:  "If the total expected cost of a modification for a lender taking into account the government payments is expected to be higher than the direct costs of putting the homeowner through foreclosure, that borrower will not be eligible."

In another third phase of the plan intended to somehow lower mortgage interest rates in general, "Treasury is increasing its Preferred Stock Purchase Agreements [with Fannie Mae and freddie Mac] to $200 billion each from their original level of $100 billion each."  OK, so that's $400 billion total taxpayer purchases of Fannie and Freddie preferred stock.  Let's see, $400 billion plus $75 billion is $475 billion, enough to pay off 3.89% of all mortgage balances.

Another element of the plan is to give bankruptcy judges the power to modify the principal of a mortgage.  This issue has been debated in Congress for many years and is opposed generally by the financial industry.  It might not apply to very many mortgages...at least not yet, but maybe in another year or two at the rate things are going.

And, finally, in an apparent admission of a fear of failure of the plan itself, the plan includes improving the provisions of the miserably failed "Hope for Homeowners" program that was enacted last October in the emergency bill that included TARP.  "In order to ensure that more homeowners participate, the FHA will reduce fees paid by borrowers, increase flexibility for lenders to modify troubled loans, permit borrowers with higher debt loads to qualify, and allow payments to servicers of the existing loans."  You may recall that government data showed that a mere 25 loans were issued under the program as of last December.  It was expected that the plan would help 400,000, but lenders haven't been interested.

The heart of the U.S. credit and economic crises is still the housing crisis, namely the drop in housing values in the major metropolitan areas that amounts to about 20% of peak values.  This has left about 25% of all homeowners with zero or negative equity in their properties.  That means many lenders are insolvent due to the drop in values of their mortgages, especially second mortgages, and many investors in mortgage securities of all kinds have lost trillions in value.  There's no way to quickly restore housing values to their peak of late 2006 through early 2007.  That could only be done with a program of deliberate and massive inflation that would probably make the economic crisis much worse in the near term.

The only rational solution that can fix the mortgage problem is to reduce the principals of mortgages.  Most citizens object to the concept of just modifying the principals of mortgages by any means with no cost to the homeowners.  Furthermore, such an approach severely damages the lenders' balance sheets which means more bank closures and lender bankruptcies.  The only other approach to reduce mortgage principals would be to replace a significant portion of mortgage debt to a form that is not secured by the properties and would be much easier for consumers to manage over the longer term.  That approach would automatically restore value to the remaining mortgage principals on lender balance sheets, automatically provide liquidity to lenders to restart lending, and would automatically restore value to mortgage securities so investors could resume investing in all types of securities, mortgage or otherwise.  We have provided such an effective, practical, fast-acting plan, The AllStreets Bailout Plan, that would fairly benefit all Americans who own property and have a mortgage, or not.

Who could provide such lending?  Only the federal government has the resources to do that.  President Obama has repeatedly pointed out that only the federal government has sufficient resources to solve the massive financial and economic problems that plague the U.S. now.

In addition, it would be extremely helpful if the federal government would finally take action to directly modify the usurious terms of any subprime ARMs that still exist.  The subprime ARMs started the housing problem and the bulk of all foreclosures now in process still involve such loans due to their high payments resulting from huge interest rate adjustments that still haven't been relieved by lenders through voluntary loan modifications (in fact, government data show that of all the loans modified through December, 2008, fully 47% of them result in higher, not lower, payments!). 

But does the federal government have the power to conduct such lending or to modify the terms of subprime ARMs?

Yes, either Congress or the President has such power.

The Supreme Court ruled in 1934 in the case of Home Building and Loan, Ltd, versus Blaisdell that governments have the power to modify private contracts when it is necessary to protect the general welfare.  The ruling was directly germane to the present housing, financial and economic crises.  The case involved a Minnesota Foreclosure Moratorium Law in order to stem the avalanche of foreclosures during the Great Depression (when fully 50% of all homeowners lost their homes).  The law gave district courts the power to suspend foreclosure proceedings and modify the terms of the mortgage to keep the owner in the home.

Furthermore, many observers have expressed skepticism that Congress would pass the necessary legislation to modify subprime ARMs or to initiate a program of direct lending to consumers such as the AllStreets Bailout Plan.  Unfortunately that has been true so far because financial services lobbyists have short circuited or watered down almost all the efforts of Congress to effectively address the housing crisis by modifying subprime AMs or reducing mortgage principals.  Well, if that's the case, then President Obama actually has the power to do what is necessary and desirable all by himself under his Emergency Economic Power.  In fact, even if Congress was inclined to pass legislation accomplishing the recommended programs, it might be advantageous for the President to act alone first anyway, since he could get the programs started much faster than Congress. 

The AllStreets Bailout Plan was designed with one primary goal in mind, to relieve the excess mortgage debt that has left some 25% of homeowners upside down on their mortgages.  It does that with unsecured direct federal loans equally shared by homeowners and their lenders.  It also provides fair equal access to homeowners who have little or no mortgage debt and to adult American citizens who don't own properties.  See Example 1 and Example 2 for how it cures typical homeowners in large metro areas who have had 20% drops in their property values but were not made severely upside down with their mortgages by the drop.  The question arises how it would benefit homeowners in some states where some properties have dropped 30-50% in value, such as California, Nevada, Arizona, and Florida.  Of course, whether the plan would eliminate all negative equity depends on how much mortgage debt the homeowners might have.

Under the recently updated plan, the AllStreets federal loan funds 60% of the drop in value of each property from their peak values.  That means homeowners who had a 50% drop in value would get a mortgage payoff equal to 30% of the peak value of the property.  Thus, only those who had total loans-to-value of 70% or less at peak value would be cured from negative equity.  As an example, if a property was worth $600,000 at its peak, and dropped to $300,000, the loan would pay down $180,000 of the mortgage principal equal to 30% of the peak value.  If the property had 100% financing at peak value, that would mean there were $600,000 in loans.  The paid down principal would be $420,000, still $120,000 or 40% more than the value of the home.  Though the plan doesn't cure an extreme case like this, at least with the payoff there's a better chance that the borrower can cover $120,000 of negative equity than $300,000, and eventual increases in the property value would cover the negative equity of $120,000 much faster than it would cover $300,000. 

Of course it isn't written in stone that the plan must cover only 60% of the drop in property values.  We've run studies of levels of mortgage relief provided for homeowners for various levels of drops in their property values and various levels of financing at peak valuation.  We chose the 60% of the drop because at that level of federal financing any homeowner who had 90% or less of value financed at peak valuations, and a drop of 20% or less, the average drop for all U.S. homes in large cities, would be rescued from negative equity.  That level seemed the minimum level necessary to significantly relieve the mortgage and lender problems.  At that level the value of all homeowner loan authorizations would come to $2.8 trillion, and we didn't want that part of the program to get much larger.

What the foregoing shows is that many of the homeowners in states with large drops in value will not be saved by the plan at 60% funding of the drop in value.  As we pointed out in our original plan, it may be necessary to scale the level of financing up for larger than 20% drops in value to prevent many foreclosures in those areas.  For example, for areas where values have dropped 50%, it may be necessary to provide 75% funding of the drop in value in which case homeowners who had 80% or less financing at the peak value will be made whole.  It might turn out that the large scale effects of the plan will provide the largest increases in home values in some of the areas that had the largest drops, so that those with more than 80% financing at peak levels will get whole in a reasonable period of time.

Under the AllStreets Bailout Plan every residential property owner gets a Housing and Economic Recovery Certificate ("HERC") from the federal government.  The HERC shows your name, the address of the property you own, and a value equaling 60% of the drop in the value of your home from the peak in late 2006 (about a 20% drop on average in America).  So the value equals 12% of the drop in your property value.

Suppose your peak property value was $300,000, so the 20% drop in value was $60,000.  Then the value of the HERC is 60% of $60,000 or $36,000.  Suppose you had a mortgage totaling about 90% of the $300,000 in value, as so many Americans did, so your mortgage balance is about $270,000, or $10,000 more than the current value of your home (consequently you don't qualify the entire balance of your mortgage, and you can't sell without a loss).  Suppose your mortgage has a 5.75% interest rate. a payment of  $1,574.49 and 26 years remaining on the loan.  You give your HERC to your lender to pay off $36,000 of your principal, which is 13.3% of your mortgage principal.  Your new principal is $234,000, or 93.3% of your current home value.  You are now free to refinance your mortgage principal without paying down the balance further, or to sell the property without a loss.  The lender also lowers your mortgage payment based on the new principal to $1,445.92, $128.57 less than your old payment.

The $36,000 of federal funds used to pay down your mortgage is split into two loans, one of $18,000 to your lender and one to you.  The loans have a fixed interest rate of 3% for 30-years.  The loans aren't secured by your property so you are no longer upside down with your mortgage.  Your payment on the federal loan is $74.72.  The total of your new mortgage payment plus the payment on the federal loan is $1,520.64, or $53.85 less than your previous mortgage payment only.  Your lender is very happy.  Your loan is no longer upside down, and he has $36,000 of fresh liquid funds to lend, of which $18,000 is a loan from the federal government at a 3% fixed rate for 30-years, which is very inexpensive capital.         

CNNMoney.com recently published a list showing the total government dollars allocated and spent since December, 2008 as of February 10, 2009 for various loans, guarantees and direct spending for economic and financial bailouts Economy rescue: Adding up the dollars.  The list shows $10 trillion allocated and $3.8 trillion actually "spent" (actually most of the "spent" is loans not spending, and most of the "allocated" is guarantees or authorizations that may never be spent).

We can't help noticing that very little of that money is for programs to provide direct cash aid or loans to help homeowners or other individual Americans.  How can anybody justify that the taxpayers should be bailing out large corporations with almost $10 trillion of their funds and then pay the resulting future tax bill when over 2 million homeowners have been foreclosed since 2006, 25% of homeowners have zero or negative equity in their homes, 8% are unemployed and some analysts think almost 4 million more will lose their homes in the next four years?  We also note that total mortgage debt on the U.S. residential properties is estimated at $12.2 trillion as of the end of 2008 according to Freddie Mac ("Freddie Mac Update, January, 2009").  So the $10 trillion in bailout money allocated since December, 2008 could pay off 82% of all residential mortgage debt in the U.S. 

Unfortunately, while the $10 trillion will do much to save lenders and investors from their mortgage losses, hardly any it will do anything to relieve any of the excess mortgage debt of consumers that is the heart of all the financial and economic problems.  So, the taxpayer spending won't do much for most individual citizens, for the housing market or the economy in general.  Meanwhile, lenders' mortgage loans and investors mortgage securities will remain devalued assets.  Wouldn't it make much more sense for the government to dedicate $4.7 trillion to lend to homeowners and lenders as proposed by The AllStreets Bailout Plan, that would actually solve all the problems for consumers, lenders, investors and governments?

Due to continuing drops in property values, and other data refinements, it's time to update the estimate of the loans to be authorized under the AllStreets Bailout Plan.  Under the original plan all mortgages on residential properties, not just the ones in trouble, were to be paid down by 80% of the drop in value from their peak in late 2006 using 30-year 3% fixed-rate unsecured federal loans equally split between the homeowner and their lender.  To achieve fairness for American taxpayers, homeowners without mortgages get the same rights to the same federal loans, and adult citizens who don't own a residential property also get rights to the same federal loans equal to 10% of the median property value in the area they live.  Those without mortgages can use the federal loan to pay down credit card debt, to finance a business, as a personal loan or as second mortgage money to purchase a residential property.  The loans are issued without qualifications and are unsecured except the ones used to purchase a property.   Loans used to pay off mortgage debt and credit card debt are split equally between the borrower and the lender.

The plan was conceived in early 2008 an originally published in November, 2008, and the value of Housing and Economic Recovery Certificates (HERCs) that assign rights to loans was estimated at $2.1 trillion assuming a 10% drop in property values, loans equalling 80% of the drop, and a total of 98 million residential 1-4 unit properties not including mobile homes to obtain loan rights.  However, since the original estimate property values have already dropped considerably more than anticipated.  The latest data from the Federal Housing Finance Agency monthly Housing Price Index shows a drop of 10.5% in median home values in the U.S. from their peak until November, 2008.  However, the S&P Case-Shiller Index (TM Fiserv, Inc.) of median home values in the 20 largest metropolitan areas, where most of the homes are located, now shows an average drop of median values of almost 20% through November, 2008, and property values have dropped even more since then.  In addition, we've revised our estimate of the maximum number of individual residential structures that would qualify to be 115 million instead of 98 million.  So we need to update the math to estimate the total value of loans to be issued under the program.

The estimated total value of all 1-4 unit residential properties in the U.S. was about $23.3 trillion at the 2006-2007 peak.  Assume that when the HERCs are calculated for issuance the value of properties will be down 20% from their peak, or $18.6 trillion total, a drop of almost $4.7 trillion.  We originally proposed using 80% of a 10% drop to calculate the value of HERCs.  To control the size of the program, we now think that 60% of the 20% drop would be sufficient, so the total value of property-based HERCs would be $2.8 trillion instead of the $1.5 trillion originally estimated.  60% of a 20% drop in value equals 12% of equity.  Below we've estimated that of the $2.8 trillion in total HERC debt authorizations, about $1.9 trillion would be used to pay down mortgage debt, and that's 15.6% of all outstanding residential mortgage debt.  That should be sufficient to rescue most underwater mortgages, when you consider that 75% of homes still have mortgage debt less than 100% of the home value, and that housing values will stabilize or increase over the next few years due to the effects of the AllStreets program itself, plus other economic stimulus measures provided by the federal government.  

In addition to HERCs issued to property owners, all adult citizens who don't own any residential property get fair access to the government loans in an amount equal to 10% of the median property value in the area they live.  Originally we estimated that there are 180 million adult citizens who don't own property out of the 230 million or so adults 18-years of age or older in the U.S.  However, we've corrected that estimate to be no more than 120 million.  We continue to assume the median property value at the time the HERCs are issued would be no more than about $160,000, and that the median property value can be fairly used to estimate the average value of non-owner HERCs, so we ballpark the average HERC to be $16,000 for every non-owner, with a minimum of $5,000 each.  So, the total value of non-owner HERCs comes to $1.92 trillion (120 million people times an average of $16,000).

Adding the value of property-owner HERCs of $2.8 trillion to the value of non-owner HERCs of $1.9 trillion nets a total of $4.7 trillion in loan authorizations.  Compare that to the more than $10 trillion that has already been authorized for various government bailout programs (there's currently talk of at least $1 trillion more to be requested by Secretary of the Treasury, Tim Geitner).  However, note that not much of the total of $4.7 trillion of AllStreets loans would be additional government lending.  Much of the $300 billion or so loans already made to banks from the $700 billion authorized under the TARP program, could be paid back or effectively replaced by the loans in the AllStreets program.  The other $350 billion of TARP that hasn't been spent could be devoted to AllStreets loans.  Other large portions of the $10+ trillion in government bailouts are just loan guarantees or unspent authorizations that would never be needed as a result of the AllStreets program.  Also consider that presumably the program would sufficiently stimulate the economy that government tax receipts would be much larger much sooner than if the program were not implemented, and, therefore, the future costs of interest on government lending would be significantly reduced.

One interesting question to consider is how much mortgage debt would be paid down as a result of AllStreets loans.  There is now a total of $12.2 trillion of outstanding residential mortgage debt (per "Freddie Mac Update, January, 2009").  Also, according to Census Bureau data about 33% of residential properties have no mortgage at all.  Although it's difficult to precisely estimate how much of the debt would be paid down by The AllStreets loans, we think it's valid to assume that the 33% of properties without mortgages probably have lower than average value, so, at least 67% of the property-owner HERC authorizations would be used to pay down mortgage debt, and 67% of $2.8 trillion equals $1.9 trillion, or at least 15.6% of all residential mortgage debt.  That would go a long way toward relieving excess mortgage debt and freeing homeowners to refinance or sell without a loss.  It would also significantly reduce mortgage payments since the payments on paid-down principal would be recast under the program.

Recall some other important features and beneficial effects of the AllStreets Bailout Plan:

   The loans are issued without any qualification at all to every homeowner to ensure fairness and guarantee effectiveness.

   The loan on each property is split equally between the homeowner and the lender, so the bailout is fair to each unlike programs to date that bail out lenders but not the homeowners who will also foot any tax bill.

   Payments on remaining mortgage principal are recalculated based on the new principal and the original interest rate, so all mortgage borrowers get a reduction in payments to make it easier to service all their debt.

   Equity in most of the underwater properties is freed up so the homeowners can refinance or sell without short sales.  The lenders have their underwater mortgage balances transformed to a healthy position, and they obtain inexpensive liquid capital to fix their balance sheets to boot.

   Homeowners who are not in trouble also get equal fair reductions in their mortgage principals and payments also providing even more liquidity to lenders.

   The taxpayers end up with good assets on the books, loans to healthy consumers and lenders, instead of loans to banks that are still underwater with their mortgages, or "toxic assets" as is the case with the TARP bailout.

   By providing loans to all property owners, not just the ones in trouble, the plan is fair to all homeowners.

   By providing equal fair access to the government loans to adult citizens who don't own any residential property the plan is fair to all Americans.