SamSadat.com

July 17, 2008-2009

Economic Bubbles: The Federal Reserve’s Manipulation Games

By SAM SADAT, Founder & President, National Club of Real Estate Investors, Los Angeles

Never before, in our recent history, has there been as much concern about the state of our economy. Many Americans today are understandably apprehensive about their future and their eroding savings accounts.  This current recession is likely to be one of the worst in our country causing the most damage as the Baby Boomer generation is retiring.

Everywhere I go I hear how concerned people are about our economy, real estate and life in general.  Who or what is causing this reoccurring phenomenon in our system?  Bubbles are.

Bubbles originate when the Federal Reserve manipulates the interest rate and adopts loose monetary policy.  We can observe first hand the consequences of lending with no thought to borrower’s ability to repay the obligation.  How could they allow this to happen?  How can they violate such a fundamental tenet of lending?  Because the government loves creating bubbles.

Bubbles allow the government to hide their blunders, to prolong the agony in favor of the short term gain.  It would be all right if the feds just get the hell out of the way and allow each bubble to liquidate naturally, but no that’s not the way they like it!  They must further regulate, create another layer of bureaucracy to monitor the last.  Once a bubble bursts, rather than allowing these bad investments to liquidate, they fight one bubble by creating another. By not allowing the liquidation of the bubble, the Fed only ensures that the next crisis will be worse than the first. This is what I call the multiple layers of insanity.  Doesn’t this behavior remind you of the Titanic?  A massive bureaucracy that is slow to act or steer and it finally crashes and sinks!  Our government seldom acts.  It always reacts.  It’s always in a reactionary mode, managing crisis.  For my part, I am personally determined to do what I can to save our country from going down the tube like many other past great civilizations.  To do this I need you all to become more aware of what’s being done and help form a cohesive unit of responsible citizens to restore sanity to our system.  Please attend our seminars and bring your friends along.  We have a long way to go before we can affect change.  But we need to start now before it’s too late.

Speaking of bubbles, I believe we might have a bubble in oil prices.  Unlike the past oil crisis, which was always an issue of the supply shortage, this one is more about greediness.  I’m amazed that oil is abundant when we pay $140 per barrel but suddenly it becomes scarce at $100.  So, it’s not the supply issue but rather what we are willing to pay for it.  So, the price of oil will move upward some more but it could suddenly crash to half its value.  And what if it did? You can be sure the government will step in again to further regulate the industry and create the next bubble.  We must put an end to this out of control behavior and allow the system to self regulate, to self correct itself.  Allowing the Feds to run rampant will only mean one thing: an emergence of a socialist government.

I also wish to impart one more notion here.  Bursting of the oil price bubble can also mean a rebound in real estate values.  And what if you miss out on this down cycle again? Any form of hesitation, fear of getting involved, and misjudging the impact of the bubbles can cause you major heartaches down the road.  Roll up your sleeves, get in the trenches and fight for your freedom. 

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The Wall Street Journal

July 21, 2008-2009

FDIC Faces Mortgage Mess After Running Failed Bank

Subprime Lender Made Problem Loans On Regulators' Watch

By MARK MAREMONT

Federal officials heap much of the blame for the subprime mortgage mess on lenders, claiming they recklessly made too many high-cost home loans to borrowers who couldn't afford them.

It turns out that the U.S. government itself was one of the lenders giving out high-interest, subprime mortgages, some of them predatory, according to government documents filed in federal court.

The unusual situation, which is still bedeviling bank regulators, stems from the 2001 seizure by federal officials of Superior Bank FSB, then a national subprime lender based in Hinsdale , Ill. Rather than immediately shuttering or selling Superior , as it normally does with failed banks, the Federal Deposit Insurance Corp. continued to run the bank's subprime-mortgage business for months as it looked for a buyer. With FDIC people supervising day-to-day operations, Superior funded more than 6,700 new subprime loans worth more than $550 million, according to federal mortgage data.

The FDIC then sold a big chunk of the loans to another bank. That loan pool was afflicted by the same problems for which regulators have faulted the industry: lending to unqualified borrowers, inflated appraisals and poor verification of borrowers' incomes, according to a written report from a government-hired expert. The report said that many of the loans never should have been made in the first place.

Hundreds of borrowers who took out Superior subprime loans on the FDIC's watch -- some with initial interest rates higher than 12% -- have lost their homes to foreclosure, data on the loans indicate.

Banking regulators are grappling with a new round of woes related to subprime mortgages, which were generally made to people with poor credit histories. This month, the FDIC took control of the IndyMac Bank, a major lender that specialized in higher risk loans, after it failed. The FDIC intends to keep IndyMac open, as it did with Superior , but it doesn't plan to originate any new mortgages.

At the time the FDIC was running Superior , subprime lending hadn't yet emerged as the national disaster it since has become. But some lending experts already were faulting industry practices and warning about rising delinquencies. The FDIC's problems with Superior could fuel criticism that bank regulators were slow to heed warning signs.

The FDIC, one of the chief U.S. bank regulators, manages a giant insurance fund that compensates customers of failed banks, and it takes charge of banks seized by the government. It has taken over hundreds of failed banks over the years, and generally has a good track record handling the difficult job.

The Superior situation could be costly for the FDIC. Texas-based Beal Bank SSB, which bought a portfolio of Superior loans, about half of them originated under the FDIC, is suing the agency in U.S. District Court in Washington . The suit claims many of the loans were made improperly and are plagued with problems.

An internal FDIC legal assessment, obtained by Beal Bank and filed in court last month, acknowledged "numerous appraisal deficiencies" in the portfolio and a "small number of loans that appear to be fraudulent from inception." Calling the FDIC's legal position poor, the undated 26-page assessment suggested that the agency's liability could be as much as $70 million. Another FDIC official, in a deposition, estimated that the cost of settling the case could be less than one-third that amount.

In a recent court filing, the FDIC estimated that about 1,500 of the 5,315 loans it sold to Beal either have defaulted or are nonperforming. The FDIC already has bought back another 247 of the mortgages, most of them for violations of federal anti-predatory-lending laws intended to protect borrowers from unreasonably high fees or deceptive practices. Beal Bank has said in court filings that 73 of the repurchased loans were originated while the FDIC was running Superior .

In a statement, FDIC spokesman Andrew Gray said the agency was "prepared to immediately work with Beal" to fix any additional mortgages originated under its watch that violated consumer-protection laws or the FDIC's own subprime-lending guidelines. As for the loans it has already acknowledged were predatory, Mr. Gray said the FDIC has provided recompense to affected borrowers and instructed its servicing contractor to avoid foreclosing.

Mr. Gray added that the FDIC "remains deeply concerned about consumer-protection issues. Though these loans with relaxed lending standards were commonplace during this period, time and experience has shown that the long-term interests of borrowers were not always served well by them."

Meanwhile, a separate portfolio of Superior subprime loans that the FDIC sold to Bank of America Corp. -- which the bank in turn sold to investors -- also has been troubled. As of April, investors had suffered "realized losses" -- which generally occur after foreclosures -- on 511 of the 3,964 loans in that pool, according to data provided to investors. The vast majority of the loans were originated when the FDIC was running the bank, the data show. In May and June, two ratings agencies downgraded some securities backed by the mortgages, with one citing a large number of severely delinquent loans and other problems. A Bank of America spokesman declined to comment.

Subprime mortgages typically carry high interest rates to reflect the greater likelihood of default. For years, the government encouraged lending to low-income borrowers as a way to increase home-ownership rates. But the market got out of control after some lenders started doling out more aggressive loans, relaxing collateral requirements, and paying less attention to the ability of borrowers to pay.

FDIC Chairman Sheila Bair has been unusually forthright in putting part of the blame for the mortgage mess on regulators, who she has said should have acted earlier. But Ms. Bair -- who took office in 2006, long after the FDIC ran Superior -- also has faulted lenders, criticizing them for "lax lending standards," making "poorly underwritten" loans, and placing borrowers in "products that create financial hardship rather than building wealth."

Appraisal Issues

Brister Hightower, a retired high-school teacher, lost his rural home near Athens , Ga. , to foreclosure after he fell behind on a high-interest mortgage taken out from Superior when the FDIC was running it.

Twenty years ago, Mr. Hightower had purchased what he calls a "small, run-down house" with a tin roof adjacent to a trailer park. He worked with a cousin to fix up the interior, and added insulation, vinyl siding and a second bathroom. In December 2001, he refinanced it with a $120,700 mortgage from Superior , using the proceeds to pay off an earlier loan and some other debt. The 20-year mortgage carried a 10.75% fixed interest rate, compared with the roughly 7% rate then available to borrowers with good credit.

Some subprime problems have been blamed on lenders giving out mortgages for more than a house is worth, immediately putting the borrower in a financial hole. The appraisal used by Superior valued Mr. Hightower's home at $142,000. The three "comparable" properties used to justify that appraisal were well-tended houses situated miles away in neighboring counties. Two were close to the center of Athens , where county officials say property values in general were much higher than in Mr. Hightower's area. County records show the fair-market value for tax purposes of Mr. Hightower's home was less than $84,000.

His loan was among those sold to Beal Bank by the FDIC. Mr. Hightower, now 68 years old, says he tried to keep up payments, but couldn't after "it got to the point I could hardly eat." Beal foreclosed, and in 2005 sold the property at auction for $76,000.

Told that the FDIC was running the bank when it gave him the loan, Mr. Hightower says: "I wouldn't expect the government to rip me off...Can I get some money back?" The FDIC didn't respond to questions about Mr. Hightower's loan.

Superior Bank, based outside of Chicago , was 50% owned by the Pritzker family of Chicago , which also controls the Hyatt hotel chain. The bank had just 18 branches, but grew rapidly in the 1990s by making subprime loans nationwide through a subsidiary, Alliance Funding. When Superior failed in July 2001, regulators faulted it for "poor lending practices" and overly rosy valuations of assets related to its securitization of subprime loans.

When the FDIC learns a bank is about to fail, it tries to locate a buyer ahead of time to assume its deposits and loans. With Superior , the agency had little warning. A private-sector rescue plan had fallen apart at the last minute. The agency decided that the best way to maximize the value of the failed bank was to continue operating it under a new name while it searched for buyers.

FDIC Personnel

The FDIC appointed one of its senior officials to be Superior 's chairman, hired a new chief executive, and installed agency employees to oversee day-to-day operations, agency documents show. But it continued to employ many of the bank's workers who originated subprime mortgage loans. The FDIC sold Superior 's branches and its deposit-taking business for $52.4 million in late 2001, but no prospective buyers materialized for its subprime-lending unit. The FDIC stopped funding new loans in early 2002, and shuttered the operation by that May 31.

Both before and after the FDIC takeover, Superior relied heavily on a national network of independent mortgage brokers to locate potential borrowers. Some such brokers have been criticized for focusing more on the fees they collect from generating loans than on the ability of borrowers to pay. The FDIC says it was concerned about the dependence on brokers, and brought in "independent compliance examiners" to look at Superior 's lending standards. The agency says it changed some of the guidelines several months after it took charge.

But in a deposition in May for the Beal Bank litigation, a senior FDIC official suggested that fixing the bank wasn't the agency's top priority. "Our job was to go in and sell the assets of the institution, and not try to clean up the operations, per se, to make this a better bank," said the official, Gail Patelunas.

Mitchell L. Glassman, director of the FDIC's division of resolutions and receiverships, defended the agency's oversight of Superior in a 2004 letter to FDIC's inspector general. He said that mortgage applications submitted through brokers were first checked by 270 in-house underwriters, then rechecked by a staff of 21 quality-control auditors, who "effectively conducted due diligence" on all incoming loans using a 200-item questionnaire.

Beal Bank, based in Plano , Texas , sued the FDIC in 2002, not long after it finished paying the agency about $339 million for 5,315 Superior mortgages. Roughly half were "New Superior" loans originated when the FDIC was in control, and half were underwritten by "Old Superior."

Although the FDIC usually sells such loans on an as-is basis, the agency backed the Superior loans with extensive warranties about their quality, including that there was no fraud or misrepresentation in their origination. The FDIC says it included such guarantees, in part, to give Beal Bank the ability to sell back to the agency any loans that had fallen through cracks in the oversight process.

In its court filings, Beal Bank claims that many of the loans weren't as represented by the FDIC. It says some were based on negligent or fraudulent appraisals, and others were based on false or inaccurate information about borrower income. It also says that minority borrowers were given loans with higher fees and interest rates than similarly situated white borrowers, in violation of federal law.

"The FDIC has established high standards of ethical and legal conduct for mortgage lenders that it regulates, but has demonstrably failed to meet these standards in its lending activities at Superior and loan sales to Beal Bank," says Andrew Sandler, an attorney at Skadden Arps Slate Meagher & Flom LLP, who represents Beal Bank. "This lawsuit is about requiring the FDIC to meet its own standards of accountability."

'Gross Discrepancies'

An internal FDIC legal memo on the case that was turned over to Beal Bank's lawyers refers to "gross discrepancies" in some loan files, including forged signatures or "wildly different signatures purporting to be that of the same person." A single mother claimed two children in applying for a loan, but later cited the needs of five children when she failed to make a single payment, according to the memo, which is undated.

In 2004, the FDIC hired an outside expert, Silver Spring , Md. , consultant Ronald L. Freudenheim, to assess the loans sold to Beal Bank. A version of the consultant's report, recently filed in court by Beal, said that 13% of the loans showed no evidence that the borrowers' incomes were verified, while in 16% of loans the borrowers had too little income for the debt they were taking on. Overall, he said, 56% of the loans violated Superior 's guidelines and "should not have been issued." The assessment didn't differentiate between Old Superior and New Superior mortgages.

The FDIC says that was a draft report. Last month, the agency filed a final version in court, which estimated that about 19% of the loans sold to Beal contained "material" breaches of the warranties -- meaning there were significant problems with close to 1,000 mortgages. This version of the report blames Beal Bank for some of the portfolio's lost value, saying it serviced the loans in an "inferior" manner.

Stephen Costas, Beal Bank's general counsel, declined to comment on that. He said the Superior matter is an "isolated disagreement" with the FDIC, and that the bank looks forward to resolving it and continuing its "good relationship" with the agency.

Mr. Gray, the FDIC spokesman, said the agency has "worked in good faith to repurchase loans subject to our obligations." He said Beal Bank hadn't provided until recently enough information on the alleged problem loans for the agency to take action.

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CNNMoney.com

July 17, 2008-2009

A plan to jumpstart the mortgage market

An industry outfit hopes that by making it easier for investors to understand pools of mortgage-backed securities, it can help restart the near-dead market for them.

By Les Christie, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- A group representing the buyers and sellers of mortgage backed securities unveiled a plan on Wednesday to recharge the moribund mortgage market.

Most of the nation's mortgage loans are packaged together by their issuers - such as Countrywide, Wells Fargo and Wachovia (WB, Fortune 500) - and sold to investors as mortgage backed securities. That's how lenders raise more money to make more loans.

As the housing crisis hit last year and losses in these investments began to pile up, individuals and institutions like pension funds, hedge funds, insurance companies and banks, stopped buying these pools of residential mortgages. That left lenders cash-strapped, and made it harder for home buyers to get loans.

But now the American Securitization Forum hopes its plan, Project RESTART, will increase the supply of mortgage loans available to borrowers and lower their cost. Jump starting the mortgage market could provide a needed boost to the struggling housing market.

"Project RESTART's goal is to rebuild confidence in investors in these securities," said Tom Deutsch, ASF Deputy Executive Director.

This task is especially critical as fears continue to swirl about the health of the government sponsored enterprises, Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), which also buy loans from lenders to package and sell to investors. For the past year or so, Fannie and Freddie have provided the bulk of mortgage funding, adding to the strain they are under.

This plan aims to revive the segment of the secondary market that trades in mortgages that are not backed by the two mortgage giants.

"Mortgage credit is extremely constrained," said Tom Deutsch, ASF's Deputy Executive Director. "The market is not functioning as it should and this is one of the ways that will help restart it."

How it works

The plan calls for making the process of securitizing loans for investors more transparent, so that they can more clearly understand the nature of the mortgage pools they purchase. That would allow investors to better assess the risks and rewards of individual pools and judge their pricing more accurately, and should encourage then to resume buying these securities.

Until now, lenders provided little information to investors about the nature of the mortgages in a given pool. And most pools were made up of a wide variety of high and low risk loans. That meant investors often didn't have a real understanding of just how risky these investment pools were.

Ideally, according to Deutsch, the financial information on each individual mortgage borrower in a pool of loans would be available to investors. That's not practical. But by having lenders aggregate the borrower data in a standardized way and then disclose the character of the securities as transparently as possible, he hopes to accomplish nearly the same thing.

Pools of mortgages, for example, could be structured so that all the loans in them share many of the same traits. One pool might only contain loans from prime borrowers who have fully documented their income and their assets, put down a down payment of at least 20% and have credit scores of 720 or greater.

A conservative investor looking for a low-risk but moderate revenue stream might opt to purchase a piece of that pool.

On the other hand, more risk-tolerant investors might prefer a piece of a pool featuring all subprime borrowers with low credit scores that would offer a higher rate of return. The key is that each of these investors would know what they are buying.

Initially the focus will be on residential mortgages of all types, jumbo, prime, Alt-A and subprime, according to Patrick Greene, a senior vice president of Wells Fargo Bank and (WFC, Fortune 500) a member of the panel that worked on the plan.

"Wells Fargo ... spends every day thinking about how we can create more liquidity," he said.

And ASF has big plans to eventually apply the same kinds of processes and standards to other consumer debt that is securitized, including student and auto loans and credit cards.

The ASF has asked industry participants to submit comments on the plan between now and Aug. 22, and the plan will be adjusted accordingly. Deutsch is optimistic.

"This is an initiative with significant support from the industry, as it was developed by participants in all areas of the securitization market," he said. "We expect to see widespread adoption of the [plan]."

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Los Angeles Times

July 14, 2008-2009

Fed stiffens restrictions on mortgage lenders

New rules, aimed mostly at subprime loans, prohibit shady promotional practices and lending to home purchasers who lack the ability to repay.

By Maura Reynolds, Times Staff Writer

WASHINGTON -- The nation's central bank clamped down hard Monday on mortgage lenders, issuing new rules designed to curb the kind of shady practices that led to the subprime mortgage crisis.

Among the new rules is a restriction on the use of the word "fixed" to describe the terms of a loan whose rate will change over time, increased disclosure requirements for refinancings and home equity loans, and a prohibition on making subprime loans without verifying a borrower's income or ability to repay a mortgage even after a rate reset.

The new rules, which will take effect Oct. 1, will apply to all lenders, not just those already regulated by the central bank.

"Rates of mortgage delinquencies and foreclosures have been increasing rapidly lately, imposing large costs on borrowers, their communities, and the national economy," Federal Reserve Chairman Ben Bernanke said as he opened a meeting of the Fed board, which approved the new rules. "Although the high rate of delinquency has a number of causes, it seems clear that unfair or deceptive acts and practices by lenders resulted in the extension of many loans, particularly high-cost loans, that were inappropriate for or misled the borrower."

The new regulations particularly target abuses in the subprime mortgage market, which has been largely unregulated because the loans are securitized and held by private investors. Subprime mortgages, designed to make loans available to borrowers with low incomes or poor credit, carry above-market interest rates to compensate investors for the added risk of default.

For subprime loans, the new rules will:

* Prohibit lenders from loaning to borrowers who cannot repay the loan from income and assets other than a home's value.

* Require lenders to verify a borrower's income and assets.

* Ban prepayment penalties for the first four years of any adjustable-rate subprime mortgage; other subprime mortgages could have no prepayment penalties for two years.

* Require lenders to establish escrow accounts for property taxes and homeowner insurance for all first-lien mortgages.

For all mortgages, prime and subprime, the new rules will:

* Prohibit seven misleading advertising practices, including representing that a rate or payment is "fixed" if it will change over the course of the loan.

* Prohibit advertising in which different loans are compared unless all payments and rates are also disclosed.

* Prohibit foreign-language mortgage ads in which required disclosures are presented in English.

* Prohibit a lender from encouraging or coercing an appraiser to misrepresent a home's assessed value.

* Require lenders to credit borrowers' payments on the day of receipt

* Prohibit pyramiding late fees.

* Require a lender to provide a payoff statement within a reasonable amount of time.

* Require a good-faith estimate of all loan costs and payments within three days of an application for any loan secured by a home's value, including home equity loans and refinancings of the original mortgage. (Currently, early disclosure is required only for home-purchase loans.) Borrowers cannot be charged any fees before receiving the estimates except for a fee to obtain the borrower's credit history.

One previously proposed regulation that has since been withdrawn was disclosure of the bonuses, or "yield-spread premiums" that mortgage originators receive to underwrite subprime or other high-cost loans. The Fed said that consumer testing cast doubt on the effectiveness of the disclosure rule as proposed, and that the board is considering alternatives.

The rules "are intended to protect consumers from unfair or deceptive acts and practices in mortgage lending, while keeping credit available to qualified borrowers and supporting sustainable homeownership," Bernanke said.

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The Wall Street Journal

July 12, 2008-2009

Senate Passes Housing Legislation

Bill Faces Hurdles Before Bush Signs; Relief for Owners

By MICHAEL R. CRITTENDEN

WASHINGTON -- The U.S. Senate passed an extensive package of housing legislation Friday, reacting to the continuing erosion of home prices and growing foreclosures by taking their most aggressive step yet to address the housing crisis.

Despite the vote, which came after weeks of political wrangling, House and Senate lawmakers will still need to overcome a number of impediments before President George W. Bush can sign the bill into law.

Senators voted 63-5 in favor of the package of tax relief for homeowners, changes to the Federal Housing Administration, and a $300 billion program to refinance mortgages headed toward foreclosure into affordable loans.

The legislation also overhauls regulation of faltering mortgage-finance firms Fannie Mae and Freddie Mac. The two companies have seen their stock prices drop precipitously this week because of solvency concerns, and lawmakers hope the creation of a new regulator with broader authority over the companies boosts market confidence.

Senate passage now kicks off a round of negotiations with the House of Representatives, with lawmakers hopeful they can reconcile competing versions of the bill. The two measures contain a number of differences, including nearly $4 billion in funding for community development block grants, provisions dealing with Fannie Mae and Freddie Mac's loan portfolios, and limits on the size of loans the two government-sponsored enterprises can purchase.

The centerpiece for both bills is a program offering up to $300 billion of FHA-insured mortgages to help refinance struggling borrowers into affordable loans. The program would rely on lenders voluntarily writing down the value of a distressed loan for the homeowner to qualify for the new FHA-backed loan, and in return borrowers would have to share future price appreciation with the federal government.

Lawmakers hope the program will help avert foreclosures, with Democrats estimating it could help up to 500,000 cash-strapped homeowners. Foreclosure tracking firm RealtyTrac Inc. reported Thursday that one in every 501 U.S. households received a foreclosure filing during the month of June, an increase of 53% over June 2007.

Other foreclosure-prevention and housing-related efforts in the Senate bill include $150 million in additional funding for housing counseling, $10 billion in additional mortgage-revenue bonds, and a housing trust fund to be funded by Fannie Mae and Freddie Mac.

Senate Banking Chairman Christopher Dodd (D., Conn.) said his hope is that lawmakers can deliver the long-sought housing legislation to President George W. Bush by next week. Sen. Dodd said he and House Financial Services Chairman Barney Frank (D., Mass.) have spoken frequently about future steps they need to take with the legislation.

"If they send something back, I'm told by Congressman Frank it'll be some tweaks, as he's called it, and my hope is that we can deal with those quickly," Sen. Dodd said at a press conference.

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The Wall Street Journal

July 8, 2008-2009

Housing Bill's Tax Credit Draws Criticism

By ARDEN DALE

U.S. lawmakers are touting a home-buyer tax credit in a high-profile housing bill before Congress, but critics say it may do little to help consumers amid the mortgage crisis.

The tax credit would allow qualified home buyers to subtract the credit amount from their income taxes when they buy a home, but it requires them to pay it back over 15 years. It resembles an interest-free loan that must be repaid to the government.

The credit is part of the Housing and Economic Recovery Act, a huge package of legislation that includes a refinancing program aimed at rescuing hundreds of thousands of homeowners facing foreclosure. Housing advocates say it has a good chance of passing this summer because of increasing concerns about U.S. foreclosures.

To be eligible for the credit, a home buyer must not have owned a principal residence for the past three years. Individuals may credit the lesser of $8,000 or 10% of the price paid for the home against tax owed in the year of the purchase. (The figure for married people filing separately is $4,000.) In the second year after the purchase, they must start adding the credit amount back into taxes paid. This is done incrementally over 15 years.

Len Burman, a senior fellow at the Urban Institute and director of the Tax Policy Center , said he is "not a huge fan" of the credit. He called it "just another complicated thing for people to deal with on their tax returns," and said he doesn't think it will have a huge impact on the housing market.

The credit begins to phase out for single individuals at $75,000 of adjusted gross income, and at $150,000 for married couples filing jointly.

Sen. Benjamin Cardin (D., Md.), who sponsored an earlier bill that contained a version of the credit, called the measure targeted, timely and temporary. He said that the credit would encourage people who want to buy a first home but are worried about doing so amid declining property values, and that it will "help to stimulate the economy in the sector that triggered our economic downturn."

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Los Angeles Times

July 3, 2008-2009

California Senate passes mortgage default warning bill

The legislation, SB1137, would require lenders to give homeowners more -- and earlier -- warnings that their home loans were heading toward default.

By Marc Lifsher, Los Angeles Times Staff Writer

SACRAMENTO -- The first major bill designed to help prevent more home foreclosures in California won final passage from the state Senate on Wednesday and was sent to the governor, who was expected to sign the measure into law.
The legislation, which passed on a 32-8 vote, would require lenders to give homeowners more -- and earlier -- warnings that their home loans were heading toward default. The bill, SB1137, would take effect immediately once it had the signature of Gov. Arnold Schwarzenegger.

The bill also gives renters more time to find a new place to live when they are being evicted because their landlord is losing the property.

A third provision authorizes local governments to force lenders to maintain property that is sitting empty after a foreclosure.

"SB1137 will make a difference right away," said the author of the bill, Senate President Pro Tem Don Perata (D-Oakland).

"This legislation is an important piece of the puzzle of how to best protect California homeowners and communities from the fallout from the nation's mortgage crisis," Perata said.

Schwarzenegger, who this year persuaded state-licensed lenders to voluntarily help homeowners get out from under costly adjustable-rate mortgages, welcomed the Perata bill.

"This bipartisan legislation provides one more tool by giving borrowers the critical time needed before a foreclosure to work with their lenders," Schwarzenegger said.

Schwarzenegger's approval became all but certain after protracted negotiations between Perata and his backers -- mainly labor unions, community activists and advocates for fair lending practices -- found common ground with lobbyists for the banking and real estate industries.

The finished product, said Susan DeMars, executive director of the California Mortgage Bankers Assn., provides borrowers with relief "without arbitrarily limiting access to credit or discouraging investments that are needed to restore liquidity to California 's housing market."

Passage of the bill came just after the state Department of Corporations released its latest monthly lenders survey, which contained mixed news on the real estate front.

On the positive side, the state reported that the number of loans being modified each month to require lower payments jumped 49% from January to May, when 8,686 so-called workouts of loan terms occurred.

But that progress did little to stem the number of monthly foreclosures, which rose by about 5% to 13,622 during the same five-month period.

Perata and Assembly Speaker Karen Bass (D-Los Angeles) said they hoped that Wednesday's passage of the foreclosure-prevention bill would create momentum to resurrect a handful of related measures that had been killed or watered down in the Senate two weeks ago.

Bass said she was focusing on key portions of AB1830 by Assemblyman Ted Lieu (D-Torrance).

"We are developing an effective package of bills to submit to the governor in August," Bass said.

An earlier version of Lieu's bill addressed three problems linked to sub-prime loans, which were typically made to borrowers with blemished credit who couldn't qualify for traditional fixed-interest-rate loans.

It sought to prohibit stated-income loans, which allow people to qualify for mortgages without proving they have the income to make the monthly payments.

Lieu's bill also would have banned less-than-interest-only loans, whose principal increases with each monthly payment, and pre-payment penalties that make it expensive to pay off loans before they reset to a higher interest rate.
Mortgage bankers contend that negotiations are moving toward an agreement with Lieu and Democratic leaders on AB1830.
California lawmakers, they cautioned, need to be careful that any new law is in harmony with new sub-prime mortgage regulations that are expected to be issued in Washington this summer by the Federal Reserve.

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The Wall Street Journal

June 24, 2008-2009

U.S.-Backed Mortgage Program Fuels Risks

FHA Struggles To Eliminate Loans For Zero Down

By NICK TIMIRAOS

Mortgages that allow consumers to put little if any money down when buying a home have largely disappeared as a financing option available from private lenders. But they are still available -- and growing more popular -- through a government-backed program.

That's raising concerns among critics who blame no-money-down mortgages for many of today's housing market woes. And while federal housing officials are moving to end the practice, for now home builders are promoting the programs to move unsold inventory.

"I just smell a massive taxpayer burden coming," says Sen. Christopher Bond (R., Mo.), who calls the programs "too good to be true."

The offers -- including "100% financing" -- are made possible due to down-payment assistance programs run by nonprofit organizations. These programs are funded largely by home builders and also by private homeowners desperate to sell. The seller-funded groups provide enough down-payment money to buyers that they can qualify for a mortgage backed by the Federal Housing Administration, which requires at least a 3% down payment.

Supporters of the down-payment programs say they help the FHA fulfill its goal of assisting first-time home buyers. But critics say the programs will burden the government agency, and taxpayers, with bad loans. The FHA, which essentially is filling the void left by the collapse of the subprime market, renewed a push to eliminate the programs this month, after warning that above-average default rates for seller-assisted down-payment programs will force the agency to request a government subsidy for the first time in its 74-year history. The agency says it will need $1.4 billion next year.

The FHA estimates that down payments provided by nonprofit groups account for 34% of all 200,000 loans backed by the FHA so far this year, up from 18% in all of 2003 and less than 2% in 2000. And the agency says that borrowers are two to three times as likely to default on their payments when they receive a down payment from a nonprofit.

D.R. Horton Inc., the nation's largest home builder by volume, is touting "100% financing" for its two- and three-bedroom condominiums near the beach in Maui , Hawaii , which start at $498,000. In the Seattle area, local builder Quadrant Corp. is advertising townhouses that can be purchased with as little as $500 down. "Use your coffee budget to move into a new home," says an online promotion. In the St. Louis area, Vantage Homes recently promoted its suburban developments with ads suggesting a new home should be on the list of things to buy for those "looking for something to spend your economic stimulus check on."

A flier promoting D.R. Horton's Maui development, for example, says that funds for the down payment would be provided by Nehemiah Corp. of America , the largest private down-payment assistance provider. D.R. Horton, based in Fort Worth , Texas , didn't return calls seeking comment. Scott Syphax, president and chief executive of Nehemiah, a nonprofit organization, said D.R. Horton is one of 95,000 companies and individual home sellers that have participated in the assistance program.

To critics, mortgages with down-payment assistance are similar to no-money-down subprime loans, which have triggered a wave of foreclosures. Most bankers believe defaults are so high because borrowers who encounter financial difficulties are more willing to walk away from a home when they didn't put much of their own money into the purchase.

"The inescapable fact is that seller-funded down-payment assistance is particularly susceptible to losses," says Howard Glaser, a mortgage-industry consultant and former official at the Department of Housing and Urban Development. "Too often today's seller-funded loan is tomorrow's foreclosure."

Stalled Home Sales

Several years ago, during the height of the housing boom, some of the nation's biggest builders curtailed use of seller-funded assistance programs because lenders offered 100% financing, often via their subprime divisions.

But home builders are again embracing the programs because home sales have stalled, the subprime market is largely shut and traditional lenders are requiring large down payments. Under the down-payment assistance programs, a third-party nonprofit provides the money to the buyer and is then reimbursed by the seller. The seller's contribution to the program isn't tax deductible as a charitable contribution. FHA regulations prohibit sellers from providing direct cash gifts to buyers, due to concerns that the value will be added to the price of the home, inflating its value.

Home builders say touting no- or low-money-down financing helps bring in new customers, even if they ultimately choose more conventional financing. "The bottom line...is these promotions work," John F. Eilermann Jr., chief executive of McBride & Son Enterprises Inc., the parent company of Vantage Homes, said in an email. He said the current marketplace demands flexibility, and he credits "creative marketing," such as promotion of its $500-moves-you-in program, with increasing new home sales in 2007 from the previous year.

Advocates of down-payment assistance say the programs are also good for the broader economy. Nehemiah's Mr. Syphax calls the FHA program an "economic stimulus." Home builders fear that eliminating the programs will cripple sales. "It would chill the market here," says Jeff Johnson, sales manager for Maracay Homes in Phoenix .

Dick Whitmore, a 47-year-old construction superintendent in Phoenix , put up just $250 to move into a three-bedroom home that he purchased in March for $189,000. He says the down payment and closing costs, which came to about $12,000, were paid by the family selling the home via AmeriDream Inc., a down-payment-assistance program based in Gaithersburg, Md. "My wife and I are hardworking people, but to come up with five or six grand, that's next to impossible," he said.

Gloria Harris, a 57-year-old human-resources consultant, says she couldn't have bought her $216,000 two-bedroom condo in McLean , Va. , in January without the $16,000 contributed by the seller to cover the down payment and closing costs. "I was having a hard time just trying to save because I was spending from week to week trying to live," she says.

Avoiding ARMs

To be sure, the overwhelming majority of subprime loans in default are adjustable-rate mortgages. FHA-backed loans, including those with down-payment assistance, are fixed-rate loans with income verification requirements, which have better track records.

Assistance providers say their products helped keep low-income families away from subprime loans that reset to higher rates. The FHA had as recently as 2005 warned that eliminating seller-funded down payments would leave borrowers with "options that are more costly and riskier than FHA."

They also reject criticism that they are responsible for the FHA's recent shortfall. "We are a convenient scapegoat," says Mr. Syphax.

Seller-funded groups and supporters in Congress say that such programs should be regulated but not shut down, a proposal that HUD hasn't shown much interest in in recent years. "If there's a problem, let's fix it," says Rep. Gary Miller (R., Calif.), a vocal defender of the program and a former home builder and developer.

In the past, nonprofit groups have consistently outmaneuvered Congress and the regulatory agencies that have tried repeatedly to shut them down, thanks in part to a well-coordinated lobbying effort by a coalition of the nonprofit companies, low-income housing and minority groups and home builders. "I have holes on my shoes from walking around Washington ," says Mr. Syphax.

The two sides have a long history of doing battle. Housing officials backed down from a fight in 1999, and earlier this year courts rejected a similar attempt to shut down the program.

The nonprofit groups have the backing of several influential members of Congress, including Reps. Maxine Waters (D., Calif.) and Barney Frank (D., Mass.). The Congressional Black Caucus and the Congressional Hispanic Caucus sent letters this month to House and Senate leaders urging that the programs stay intact, citing their role in improving minority home-ownership rates.

In current versions of the FHA modernization bill, the Senate would eliminate the down-payment programs and a vote on the bill is expected this week; the House version keeps the program in place. Rep. Frank said in an interview that he believed a compromise could be reached with the Senate that would preserve the program but with tougher lending requirements. "No one is talking about leaving it untouched," he says.

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Orange County Register

June 17, 2008-2009  

Demand for O.C. homes hits nearly 3-year high

THE ORANGE COUNTY REGISTER

    Market watcher Steve Thomas at Re/Max Real Estate Services in Aliso Viejo reports that shoppers’ demand for Orange County housing (as measured by homes placed into pending escrows in local brokers’ listing service within the past month) hit 3,060 Thursday – the highest since September 2005.

   Meanwhile, the active inventory of Orange County homes listed for sale dropped below 15,000 for the first time since the beginning of January.

   Says Thomas: “Many homeowners do not want to compete with the volume of short sales, sellers who owe more than their homes are worth, and foreclosures. The general public is acutely aware that it is a buyer’s market and that it takes a lot of time and patience to sell. I was expecting the inventory to grow to 20,000 homes, but I simply did not factor that the public would perceptively refrain from marketing their homes without proper motivation.”

   Thomas calculates “market time,” a benchmark of how many months it theoretically takes to sell all the inventory in the local Multiple Listing Service for-sale listings at the current pace of pending deals being made. By this Thomas logic, it would take 4.86 months for buyers to gobble up all homes listed for sale at the current pace of deals, compared with 5.61 months two weeks earlier and 8.50 months a year ago.

   Also, Thomas reports that the number of Orange County distressed properties (homes listed by agents as foreclosures or short sales) was 5,898 last week, down seven vs. two weeks ago. It’s the first such drop in 2008-2009.

   Distressed properties, as a percentage of all listed homes for sale, were 39.6 percent of the market last week. Since Dec. 27, the number of distressed homes on the market has grown by 2,147 while the nondistressed supply is 2,782 lower. 

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Los Angeles Times

June 10, 2008-2009  

Pending home sales rise in April

A National Assn. of Realtors index unexpectedly increases to its highest reading since October.

From the Associated Press

NEW YORK -- Pending home sales unexpectedly increased in April to the highest reading since October, an industry group said Monday, but they remain more than 13% below the year-earlier period.

The National Assn. of Realtors' seasonally adjusted index of pending sales for existing homes rose to 88.2 from a March reading of 83, the lowest since the index was started in 2001. The index stood at 101.5 in April 2007.

Wall Street economists polled by Thomson/IFR had predicted that the index would remain steady at 83. A reading of 100 is equal to the average level of sales activity in 2001.

The April index in the West climbed 8.3% from March and was 4% higher than a year earlier. In the Midwest , the index jumped 13%, but was still lower than in 2007. The South posted a 4.6% gain, while the Northeast index declined 1.9%.

Realtors association Chief Economist Lawrence Yun noted that pending sales contracts had ticked up in areas with the largest price declines such as Detroit and Las Vegas .

"Bargain hunters have entered the market en masse," he said. "Sharp price reductions are leading to a quicker discovery of price equilibrium points."

Yun forecasts that the median price of an existing home will drop 8.4% in the first half of the year before stabilizing. In 2009, prices will rise 4.4% to $213,900, he predicts.

Existing-home sales this year are expected to total 5.4 million and then increase to 5.74 million next year, Yun said.

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Orange County Register

June 4, 2008-2009

Rent or buy? O.C.’s purchasing math improves

Moody’s Economy.com has taken some of the guess work out of the eternal question, “Should I rent or buy?”

Their answer is the rent/buy ratio which is determined by dividing the median price of a house by the cost of renting that house for a year. David Leonhardt at the New York Times — a longtime advocate of renting — became a convert to buying based on the ratio when he was reassigned to Washington, D.C. this year. The good news for Orange County is that the rent ratio in the first quarter was 22.2, down from a peak of 29.7.

“Rent ratios going down mean houses are becoming more affordable to buy,” says Arnold Slesers, the Economy.com economist who crunched the numbers.

The bad news is that Orange County is tied for sixth highest rent ratio among the top 46 metropolitan areas, which means things are still expensive here. For instance, the ratio in Leonhardt’s new metropolitan Washington , D.C. area is an even more affordable 16.8.

Most affordable home U.S. buying areas? Columbus , Ohio , at 11.4, New Orleans at 11.5 and Indianapolis at 11.9. The 10 most expensive …

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Los Angeles Times

May 25, 2008-2009

NATION'S HOUSING

Declining-market surcharge dropped

Fannie and Freddie reverse the policy that made buyers cough up bigger down payments in certain locales.

By Kenneth R. Harney
Washington Post Writers Group

WASHINGTON -- Could the controversial mortgage industry practice of listing hundreds of local real estate markets as "declining" -- and restricting lending through higher down payments or credit scores -- be scrapped?

The two biggest players in the home mortgage field, Fannie Mae and Freddie Mac, did precisely that on May 16. Reversing its policy of penalizing buyers in troubled real estate markets with 5% higher down payments, Fannie Mae switched to a nationally uniform policy of charging borrowers the same minimum down payments irrespective of location. A spokesman for Freddie Mac, Brad German, said his company would be "suspending" its declining markets policy indefinitely as well.

Starting June 1, mortgage applicants who are underwritten by Fannie Mae's automated system online will qualify for 3% minimum down payments, wherever the property is located.

Borrowers whose applications require "manual" underwriting will pay 5% minimum down payments.

Under Fannie Mae's prior system, applicants buying in designated declining markets had to contribute 5% extra in upfront equity compared with borrowers in nondeclining market areas.

Freddie Mac's policy, which never employed a list of areas designated as declining, relied instead on lenders to flag applications using appraisal data or home price indexes. Freddie's policy also required 5% higher equity contributions upfront.

Critics -- including the National Assn. of Realtors and consumer advocacy groups -- had charged that Fannie Mae's policy served to further depress sales and real estate values in areas tainted as declining.

They also argued that many metropolitan markets experiencing price decreases contain sub-markets performing relatively well, and they do not deserve to be underwritten as high risk.

Marianne Sullivan, Fannie Mae's senior vice president for single-family credit and risk management, said the policy reversal was possible because of improvements to the company's automated underwriting system, allowing it to "assess each loan more precisely."

The change was welcomed by national real estate and housing groups.

Dick Gaylord, president of the National Assn. of Realtors, said the termination of a policy that "stigmatized" certain communities will "help stabilize the credit markets."

David Berenbaum, executive vice president of the National Community Reinvestment Coalition, said his group hopes the revised policies at Fannie Mae and Freddie Mac will prove to be "a model for others to follow."

Whether that happens any time soon, however, is far from certain. Private mortgage insurers, who provide loss protection to lenders on loans with low down payments, have virtually all adopted highly restrictive policies affecting ZIP Codes or metropolitan areas they designate as declining.

MGIC, the largest-volume insurer, recently expanded its list of distressed markets along with a series of cutbacks on specific types of low-equity loans. As of June 1, MGIC will not insure condominium mortgages in the state of Florida . It also has abandoned cash-out refinancings and loans on investment properties.

PMI Group, another major underwriter, has banned cash-out refis or investor loans in areas it judges to be distressed. Genworth Financial will not consider applications on second homes anywhere in Florida . AIG United Guaranty no longer will write insurance on condominiums in any of hundreds of ZIP Codes around the country that are on its declining markets list.

Asked whether his firm might reevaluate its declining markets restrictions in light of the abrupt changes at Fannie Mae and Freddie Mac, Terry Souers, a spokesman for Genworth Financial's mortgage insurance unit, said: "We're aware of their actions and will take them into consideration to see if additional steps are necessary."

But Michael J. Zimmerman, senior vice president of investor relations for MGIC, shot down hopes for any quick abandonment of declining markets restrictions at his firm. "We're not contemplating any changes," he said.

MGIC, which reported a $1.4 billion loss for the fourth quarter of 2007 and a $34 million loss for the first quarter of this year, has been hit hard by claims following foreclosures and extended delinquencies in once-booming housing markets.

What's the trend line here?

Fannie Mae's and Freddie Mac's policy switches should open the door to some additional low-down-payment mortgages -- and home sales -- in local areas once tagged as declining.

However, without the participation of private mortgage insurers -- who report solely to stock market investors rather than to Congress -- many borrowers will likely have to turn to the Federal Housing Administration, which accepts 3% down, does not have declining markets restrictions and whose loans can be purchased by Fannie Mae and Freddie Mac.

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Orange County Register

May 13th, 2008-2009

Banks offer 20% off foreclosed homes in O.C.

by Matt Padilla, Register Reporter and Blogger

ForeclosureRadar reports banks were willing to accept 21.5 percent less than what they were owed last month at homes sold during foreclosure auctions in Orange County . That’s a sea change from a year ago, when the average discount was 1.2 percent at trustee’s sales.

The discounts are not necessarily tied to what each home is worth or what it sold for last time. They represent what the bank will accept relative to the outstanding mortgage balance and any other costs, such as late fees.

“Essentially, there was no discounting a year ago in Orange County ,” said Sean O’Toole, president of ForeclosureRadar. He said a rise in foreclosures and falling home prices are forcing banks to take losses on their loans.

Still, banks see the county’s housing market as stronger than the state as a whole. Statewide banks offered 25 percent off last month.

Even with such discounts experts say most homes offered at trustee’s sales revert back to the bank because investors were unwilling to pay even the minimum bid.

More interesting measures: O’Toole said 84 percent of properties sold in Orange County at trustee’s sales last month were offered at a discount and 34 percent were discounted 30 percent or more. A year ago only three properties out of 225 were discounted 30 percent or more.

And more foreclosures appear on the horizon.

Banks filed 1,660 foreclosure-sale notices in April in Orange County , more than double the 735 notices filed in March. That suggests foreclosures will reach new highs in May and June — a lender can auction a home 20 days after filing a notice of trustee’s sale.

O’Toole said housing sales are up and inventory is falling, but not fast enough to offset the rise in foreclosures.

“It is time for lenders to accept this reality, and start approving short sales rather than forcing more than two-thirds of troubled homeowners through the entire foreclosure process,” he said.

Short sales are when a bank agrees to let a homeowner sell his or her property for less than the debt owed. Some experts say short sales are bad for one’s credit profile, but not as bad as foreclosure.

Banks foreclosed on 1,133 properties in the county last month, up 49 percent from March and 364 percent from a year ago.

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The Wall Street Journal

May 6, 2008-2009

The Housing Crisis Is Over

 By CYRIL MOULLE-BERTEAUX

The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008-2009 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.

How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won't happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor.

Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982.

Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what's going to stop the housing decline? Very simply, the same thing that caused the bust: affordability.

The boom made housing unaffordable for many American families, especially first-time home buyers. During the 1990s and early 2000s, it took 19% of average monthly income to service a conforming mortgage on the average home purchased. By 2005 and 2006, it was absorbing 25% of monthly income. For first time buyers, it went from 29% of income to 37%. That just proved to be too much.

Prices got so high that people who intended to actually live in the houses they purchased (as opposed to speculators) stopped buying. This caused the bubble to burst.

Since then, house prices have fallen 10%-15%, while incomes have kept growing (albeit more slowly recently) and mortgage rates have come down 70 basis points from their highs. As a result, it now takes 19% of monthly income for the average home buyer, and 31% of monthly income for the first-time home buyer, to purchase a house. In other words, homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in.

The next question is: Even if home sales pick up, how can home prices stop falling with so many houses vacant and unsold? The flip but true answer: because they always do.

In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.

The explanation is that by the time home sales stop declining, inventories of unsold homes have usually already started falling in absolute terms and begin to peak out in "months of supply" terms. That's the case right now: New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March. This inventory is equivalent to 11 months of supply, a 25-year high – but it is similar to 1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six months.

Inventories are declining because construction activity has been falling for such a long time that home completions are now just about undershooting new home sales. In a few months, completions of new homes for sale could be undershooting new home sales by 50,000-100,000 annually.

Inventories will drop even faster to 400,000 – or seven months of supply – by the end of 2008-2009. This shift in inventories will have a significant impact on prices, although house prices won't stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market.

Many pundits claim that house prices need to fall another 30% to bring them back in line with where they've been historically. This is usually based on an analysis of house prices adjusted for inflation: Real house prices are 30% above their 40-year, inflation-adjusted average, so they must fall 30%. This simplistic analysis is appealing on the surface, but is flawed for a variety of reasons.

Most importantly, it neglects the fact that a great majority of Americans buy their houses with mortgages. And if one buys a house with a mortgage, the most important factor in deciding what to pay for the house is how much of one's income is required to be able to make the mortgage payments on the house. Today the rate on a 30-year, fixed-rate mortgage is 5.7%. Back in 1981, the rate hit 18.5%. Comparing today's house prices to the 1970s or 1980s, when mortgage rates were stratospheric, is misguided and misleading.

This is all good news for the broader economy. The housing bust has been subtracting a full percentage point from GDP for almost two years now, which is very large for a sector that represents less than 5% of economic activity.

When the rate of house-price declines halves, there will be a wholesale shift in markets' perceptions. All of a sudden, the expected value of the collateral (i.e. houses) for much of the lending that went on for the past decade will change. Right now, when valuing the collateral, market participants including banks are extrapolating the current pace of house price declines for another two to three years; this has a significant impact on the amount of delinquencies, foreclosures and credit losses that lenders are expected to face.

More home sales and smaller price declines means fewer homeowners will be underwater on their mortgages. They will thus have less incentive to walk away and opt for foreclosure.

A milder house-price decline scenario could lead to increases in the market value of a lot of the securitized mortgages that have been responsible for $300 billion of write-downs in the past year. Even if write-backs do not occur, stabilizing collateral values will have a huge impact on the markets' perception of risk related to housing, the financial system, and the economy.

We are of course experiencing a serious housing bust, with serious economic consequences that are still unfolding. The odds are that the reverberations will lead to subtrend growth for a couple of years. Nonetheless, housing led us into this credit crisis and this recession. It is likely to lead us out. And that process is underway, right now.

Mr. Moulle-Berteaux is managing partner of Traxis Partners LP, a hedge fund firm based in New York .

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