A Housing Solution that Focuses on (Gasp!) Houses

This post first appeared on Minyanville and our sister site, Dawn Patrol.

Every once in a while, the most important news story of the day is the one the Wall Street Journal allots a mere 200 words.

In a move that will soon be greeted with quiet mutterings of “I should have seen this coming,” British Prime Minister Gordon Blair announced today a shift in the focus of initiatives aimed at reviving the ailing housing industry, and by extension the rest of the economy.

Until this point, much of the government-directed efforts to fix broken housing markets -- both here and abroad -- have focused on the mortgage side of housing transactions.

This should come as no surprise, as Wall Street banks like Goldman Sachs (GS), Merrill Lynch (MER), Lehman Brothers (LEH) and Bear Stearns -- er, JPMorgan (JPM) -- had staked their reputations -- and balance sheets -- on those mortgages.

Foreclosure prevention has attempted to preserve the integrity of the loan by extending its ability to keep generating cash for the lender. If a family or 2 were helped in the process, all the better. But with trillions of dollars in securities propping up the world's financial system based on unreliable monthly payments from struggling American consumers, the mortgage was saved in favor of the property itself or its inhabitants.

HOPE NOW and Project Lifeline have been our bureaucrats’ best effort at leeping people from being kicked out of their homes. Anecdotally and by the numbers, the results have been less than awe-inspiring.

As part of a larger economic reform package, Brown is taking a decidedly different approach. Any homeowner behind on his mortgage and facing the risk of repossession will have his situation evaluated by a “money advisor,” who, according to the Guardian, will determine whether nor not the loan is worth salvaging.

If this guru of the economically unfeasible gives the thumbs-down, the borrower gets a rescue package; the government gets the house. A housing association or other publicly funded group can then lease the property back to for the former homeowner or otherwise rehab the property for new tenants.

The lender can either be made whole or can retain some of the risk (and therefore potential return) in the property, staying in the game a bit longer.

This focus on the raw asset -- the house -- rather than on a flimsy deed of trust represents a step in the right direction in the "war on foreclosures." The mere fact that Washington (and London) are dipping their tentacles this deep into housing markets should rightly disturb anyone with even half-hearted capitalistic ideals - but some government plans are better than others.

The problem with mortgage-focused foreclosure prevention is that it prolongs a borrower’s agony by keeping him in a loan he or she should never have taken out in the first place. The house itself bears the brunt of this strategy's shortcomings, since homeowners forgo maintenance, landscaping, trash removal and other value-preserving services to survive another month.

By stepping in and taking control of the property before the copper pipes can be ripped out and the repossession process can further erode the home's resale value, the plan could slow some of the economic hardship and community decay caused by abandoned, vandalized homes.

Although the business of buying and selling distressed mortgage assets -- including bank-owned homes -- is hacking its way through the world of troubled properties, the scale of the problem and the challenging nature of the transaction itself mean that the crisis will take years to work through.

If the government is going to use taxpayer dollars to try to get us out of this mess, land banks and direct funds for rebuilding communities isn't a terrible place to start.

It sure beats bailing out Wall Street.

Mortgage Reform: Why Government Intelligence is Oxymoron

This post first appeared on Minyanville and our sister site Dawn Patrol.

After leading the banking sector to its largest ever one-day drop yesterday, Washington Mutual (WM), in an effort to assuage concerns that it's facing a cash crunch, released a statement claiming that the bank is "well-capitalized."

Though the stock bucked the trend this morning as the broader financial complex continued its unrelenting sell-off, shareholders aren’t likely to be comforted by the WaMu’s pleas for calm.

The largest savings-and-loan in the country has seen share prices fall below $4 following the seizure of IndyMac (IMB) by benevolent federal banking regulators; investors fear WaMu could be next.

IndyMac was reopened on Monday to handle endless lines of depositors hoping to recover their pennies from the bank’s coffers.

In a stark reminder of just how dicey bottom-picking can be, Bloomberg reminded us that private-equity firm TPG led a consortium of investors in providing the bank with $7 billion in much-needed cash in April, when the stock traded at $13. Those daring saviors have seen most of their investment wiped out.

TPG did, however, slip a protective clause into the deal: If the stock drops below $8.75 -- which it clearly has -- TPG is owed the difference, effectively putting the bank on the hook for its own equity losses. While protecting TPG's investment, this feature also makes it considerably more costly, if not impossible, for the bank to raise more capital, which would further dilute shares.

As more details emerge about these and other onerous terms with which banks have been forced to agree in their efforts to raise capital, it's becoming clear just how misguidedly optimistic investors were when such deals were first announced. Banking expert Minyan Peter wrote of the WaMu deal:

“I think the problem for most market participants right now is the assumption [that] what we're experiencing looks something like 'their prior experiences in banking crises.' And to me, that's why we have seen such a big rally over the past two weeks -- because, based on prior experience, a rally feels very right, right about now.

But for all the reasons I shared before, this one is different.”

We’re now seeing just how different this one is.

Professor Depew explained Friday how the Fannie Mae (FNM) and Freddie Mac (FRE) crisis is different from the Long-Term Capital Management failure in 1998: In this case, massive losses by financial institutions around the world are a symptom, not the cause.

A few misplaced bets aren’t to blame for the market turmoil; neither is rumor-mongering. The financial system’s problems, and by extension the economy’s, are rooted in years of mispriced risk and excessive leverage. Markets are now witnessing the destruction of that debt at a rate that’s stomach-churning to the traditional buy-and-hold investor.

The process, though painful, is necessary. The debt will be destroyed, firms will go out of business and the economy will slow, if not contract. All this is healthy. Agonizing, to be sure, but healthy.

As Toddo wrote yesterday on the Buzz and Banter, “The big picture blues will lead to an unfortunate destination, but that’s necessary to rebuild the foundation for sustainable economic growth. Once we get there, those with capital will be in a fantastic position to prosper.”

The Silent Killer

What's the silent killer that's been largely ignored by the financial media as it tries to keep up with the quickly unraveling mortgage crisis? Fraud.

While there are many causes for the current meltdown, the most unexplored and and least discussed is fraud. FraudBlogger.com reported yesterday that there were $1.7 billion active cases of criminal and civil fraud reported in the second quarter of 2008.

While large, this number is painfully low and doesn't come close to capturing what was really going on in the mortgage origination business from 2005-2007. Every time a loan officer put a borrower into a loan he couldn't afford or didn't understand, the loan officer committed fraud. The vast majority of these loans are still out there, and the tabulated fraud data doesn't pick them up.

Every time an appraiser valued a property based on the lender's demand for an overstated value, the appraiser committed fraud. You and I, the taxpayers, will now get to foot the bill for all that equity appraisers created out of thin air to maintain the facade of unbiased property valuations.

Every time an accountant booked the fully amortized interest payment as income for an Option-ARM borrower making the minimum payment, while adhering to GAAP, we can all agree there isn't any chance that money will find its way to the bank's coffers. By the time the loan's written off, it will be lost in a web of billions in writedowns, and the accountant will be on to mis-pricing some other asset sitting on the bank's books.

And people still wonder why the mortgage mess keeps getting worse than even the most boogly bears have expected.

HOPE when?

Washington’s war on foreclosures, the latest in a string of sycophantic attempts to sway public opinion back in the favor of the very regulators that turned a blind eye to rampant irresponsible lending, is now being waged with carefully crafted press releases.

In the past two days, strikingly contradictory reports have emerged over the status of mortgage servicers’ efforts to stem the rising tide of foreclosures.

According to MortgageDaily.com, HOPE NOW is out with data showing it’s successfully preventing thousands of foreclosures. The servicing collective claims it prevented 170,000 foreclosures in May alone, and that almost 2 million repossessions have been averted since the program launched a year ago.

Consumer groups, on the other hand, aren’t so sure. Paul Jackson’s Housing Wire reports the California Reinvestment Coalition (CRC), advocates for low-income communities, says servicers are failing to keep troubled borrowers in their homes.

Jackson aptly points out that while both sides are engaged in an active public relations battle, what’s clear is that public perception about homeownership and lending practices is changing.

Irrespective of the data HOPE NOW or groups like the CRC gather and disseminate, defaults and the massive logistics required to work out the resulting situations have overwhelmed the loan servicing industry. No amount of government handouts, working groups or contrived federal lending facilities can contain the avalanche of home repossessions that’s already started down the hill.