The black hole of our destroyed housing market continues to grow:
Fannie Mae and Freddie Mac’s federal regulator is renegotiating the companies’ financing plan with the U.S. Treasury Department and may seek an increase to their $400 billion federal lifeline before the end of the year, according to people familiar with the talks.
These two entities hold $5.5 trillion in US mortgages and as the housing crises continues to deepen – yes, “deepen”; not, “get better” as the talking heads of finance and government have it – it just gets worse for Fannie and Freddie especially as they have such a huge percentage of the really garbage loans generated in the sub-prime boom. There is no amount of bail out which would actually solve the problem – there’s just too much bad debt secured by assets not worth 50% of the loans on them.
The only way to fix this – other than by mass citizens’ action to simply walk away from all the “underwater” loans – is to essentially put our housing and mortgage markets through bankruptcy reorganization. It would be hard, everyone would take a hit, but if we did it, the problem would be solved. Fundamentally, this involves reducing the principle owed on primary-residence homes in line with current market values for the property – and, so, a house which has lost 50% of its value would have its mortgage(s) reset at 50% of current principle, or to property market value, whichever is greater.
Doing this would do the most important thing: keeping people in their homes. There are about 10 million people “underwater” on their loans and, more and more, they are just bagging it and heading in to the rental market. If even 20% of those homes show up on the market over the next year, it will cause another big drop in home values…thus pushing even more people in to “underwater” status and thereby reinforcing the urge to walk. We’re probably already at the point where people who bought even as long as 10 years ago have lost principle – certainly, this is the case in the worst hit areas, and it will just spread and get worse unless we do something about it.
Or we can just keep bailing out banks and ignoring the fundamental issue of lost home values – and have one heck of a massive crash.
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