There will be no recovery until there is a halt in the relentless rise in foreclosures. Foreclosures threaten millions of families with financial ruin. By driving prices down, they sap the wealth of all homeowners. They exacerbate bank losses, putting pressure on the still fragile financial system. Lower monthly payments are a balm, but they are no substitute for home equity. And until more Americans can find a good job and a steady paycheck, the number of foreclosures will continue to rise.

Read the whole thing.

Two weeks ago, the U.S. Treasury released additional details (link opens .pdf) about the homeowner bailout, or in Washington-speak the “Making Home Affordable” program. Part of those details included some new ways for homeowners to avoid foreclosure. I thought the far more fascinating part, however, was the so-called “Home Price Decline Protection Incentives” (HPDP). It’s the most interesting part of the homeowner bailout that you probably haven’t heard about. I have been fascinated with the HPDP since the bailout was announced in February, and now we finally have some detail to dig into.

For some strange reason, virtually no one is talking about the HPDP. I haven’t seen a single article on it. Here’s how the new fact sheet describes it:

This initiative provides lenders additional incentives for modifications where home price declines have been most severe and lenders fear these declines may persist. These incentives will encourage servicers to undertake more modifications by assuring that incremental investor losses will be partially offset.

All of the initiatives within the homeowner bailout have attempted to stabilize the housing market. But this is the only one that provides a sort of insurance to investors if home prices continue to decline. In February I remarked that it seemed like the housing bailout included everything but the kitchen sink. I was wrong: this is the kitchen sink.

Read it all.

John Rao, an attorney who studies state foreclosure procedures for the Washington, D.C.-based National Consumer Law Center, said this court order is the first of its kind. Some states like California have required foreclosing attorneys to include a statement saying whether the homeowner has been contacted about a loan modification, but the South Carolina order requires attorneys to say why the property isn’t eligible.

“Simply contacting a homeowner is easy to do,” Rao explained. “I think what’s more important is that before they process the foreclosure, a court can look at the file and see exactly why they aren’t eligible, so there’s some transparency.”

The order actually originated from a quirky state law that prompted Fannie Mae, a government-controlled mortgage company, to ask the state Supreme Court for a 90-day delay in foreclosure proceedings for homes it guarantees. Several South Carolina consumer groups filed a response to that request, alerting the court of this backlog in homeowner requests.

Lil Ann Gray of the South Carolina Department of Consumer Affairs, which wrote to the court on behalf of struggling homeowners, applauded the court order.

Read it all from the front page of the local paper.

A quick follow up to yesterday’s post With Each Interest Rate Tick Higher Another “Green Shoot” Dies….

We are drowning under the weight of near term supply for sure but I guess I think something else is afoot here.

Look at the breakeven spread on the 10 year TIPS bond. That spread is currently 185 basis points. I do not believe that we have been that wide since the advent of the financial crisis in 2007. I think that investors are uttering a gigantic and collective nyet regarding the implementation of monetary policy and fiscal policy in the US.That is why the curve is steepening so dramatically.

Yuck. Read it all and follow the links.

As job losses rise, growing numbers of American homeowners with once solid credit are falling behind on their mortgages, amplifying a wave of foreclosures.

In the latest phase of the nation’s real estate disaster, the locus of trouble has shifted from subprime loans ”” those extended to home buyers with troubled credit ”” to the far more numerous prime loans issued to those with decent financial histories.

With many economists anticipating that the unemployment rate will rise into the double digits from its current 8.9 percent, foreclosures are expected to accelerate. That could exacerbate bank losses, adding pressure to the financial system and the broader economy.

“We’re about to have a big problem,” said Morris A. Davis, a real estate expert at the University of Wisconsin. “Foreclosures were bad last year? It’s going to get worse.”

Read it all.

As job losses rise, growing numbers of American homeowners with once solid credit are falling behind on their mortgages, amplifying a wave of foreclosures.

In the latest phase of the nation’s real estate disaster, the locus of trouble has shifted from subprime loans ”” those extended to home buyers with troubled credit ”” to the far more numerous prime loans issued to those with decent financial histories.

With many economists anticipating that the unemployment rate will rise into the double digits from its current 8.9 percent, foreclosures are expected to accelerate. That could exacerbate bank losses, adding pressure to the financial system and the broader economy.

“We’re about to have a big problem,” said Morris A. Davis, a real estate expert at the University of Wisconsin. “Foreclosures were bad last year? It’s going to get worse.”

Read it all.

If there was anybody who should have avoided the mortgage catastrophe, it was I. As an economics reporter for The New York Times, I have been the paper’s chief eyes and ears on the Federal Reserve for the past six years. I watched Alan Greenspan and his successor, Ben S. Bernanke, at close range. I wrote several early-warning articles in 2004 about the spike in go-go mortgages. Before that, I had a hand in covering the Asian financial crisis of 1997, the Russia meltdown in 1998 and the dot-com collapse in 2000. I know a lot about the curveballs that the economy can throw at us.

But in 2004, I joined millions of otherwise-sane Americans in what we now know was a catastrophic binge on overpriced real estate and reckless mortgages. Nobody duped or hypnotized me. Like so many others ”” borrowers, lenders and the Wall Street dealmakers behind them ”” I just thought I could beat the odds. We all had our reasons. The brokers and dealmakers were scoring huge commissions. Ordinary homebuyers were stretching to get into first houses, or bigger houses, or better neighborhoods. Some were greedy, some were desperate and some were deceived.

Read it all.

The average household size has declined from 3.4 in 1950 to 2.5 today, a 26% reduction. The average household size was 4.6 in 1900. Our average home size has increased from 1,000 sq ft in 1950 to 2,400 sq ft today, a 140% increase. The average square feet per person in the household has increased by 218%.

In 1950, only one percent of homes built had four bedrooms or more, but 39 percent of new homes had at least four bedrooms in 2003. We have one less person per household, but we have added one extra room. Our society has chosen to super size our houses, our vehicles, our TVs, our kitchens, our burgers, our sodas, and our egos. This desire to “keep up with the Joneses” combined with a rise in two-income families convinced millions to pour money into their home and its amenities. This seemed like a great idea when home prices were rising annually at a double digit clip. Most of the money was borrowed, so with home prices down 25% to 50% in many parts of the country the “Joneses” are in a heap of trouble.

Read it all.

Stranded by the nationwide slump in housing and jobs, fewer Americans are moving, the Census Bureau said Wednesday.

The bureau found that the number of people who changed residences declined to 35.2 million from March 2007 to March 2008, the lowest number since 1962, when the nation had 120 million fewer people.

Experts said the lack of mobility was of concern on two fronts. It suggests that Americans were unable or unwilling to follow any job opportunities that may have existed around the country, as they have in the past. And the lack of movement itself, they said, could have an impact on the economy, reducing the economic activity generated by moves.

Read it all.

Nor is excess supply the only reason prices still have a way to fall. Nationwide, homes may not be overvalued by much. But in some cities, including New York, San Francisco, Los Angeles, Boston, Chicago and Miami, they remain very expensive. So while Mr. Hatzius and his Goldman colleagues are somewhat more pessimistic than most forecasters, the difference isn’t enormous.

I’ll confess that this bearish picture isn’t exactly what I had hoped to find. A year ago, as part of a move from New York to Washington, my wife and I bought our first house. We did so fully expecting prices to continue falling (though perhaps not as much as they ultimately will, given the severity of the financial crisis). But we decided they had fallen enough for us to take the plunge. We preferred buying before the bottom of the market instead of renting and having to move again in a year or two.

Still, when I wrote about that decision last spring, I argued that anyone who didn’t have to move probably should not buy yet. Prices still had a way to fall.

They don’t have as far to fall today, but the great real estate crash is not over, either. So if you are part of the 30 percent of American households who rent and you’re trying to decide when to buy, relax.

Read it all.

The president and the Federal Reserve chairman voiced cautious optimism yesterday that the economy could be beginning to stabilize. But the economy wasn’t cooperating.

Retail sales dropped sharply in March, the government reported, and wholesale prices fell steeply. Both pieces of data underscore the hard slog the nation faces to emerge from its deep recession and the limitations of more optimistic talk from Washington. The stock market fell 2 percent, as measured by the Standard & Poor’s 500-stock index.

President Obama and Fed Chairman Ben S. Bernanke were hardly effusive. Obama acknowledged that “there will be more job loss, more foreclosures and more pain” before the recession ends. But both men, in separate speeches, spoke of an end to the sense of free-fall that enveloped the U.S. economy in the final months of 2008 and first months of 2009.

Their words reflect a new phase of the government response to the financial crisis and recession. Unlike a few months ago, the major policies meant to prop up the economy– increased government spending, special lending programs and extensive efforts by the Fed to pump money into the economy — are now largely in place. Thus, senior officials are trying to encourage Americans to be confident about the future, so that those who still have their jobs will feel more comfortable buying a house, a car or other large items.

Read it all.

From the very inception of the current downturn, sprawling places like southeast California’s Inland Empire have been widely portrayed as the heart of darkness. Located on the vast flatlands east of Los Angeles, the region of roughly 3 million people has suffered one of the highest rates of foreclosures and surges in unemployment in the nation.

Yet now George Guerrero, a top agent at Advantage Real Estate in Chino Hills, says he can see the light, with sales picking up and inventories finally beginning to drop. “There’s been a real surge in sales,” Guerrero says. “The market has come back to where it should be. I think we are ahead of the curve here of the overall recovery.”

Read it all.

The pricing of the toxic assets of the banks is in line with the pricing of other risky assets. There is no evidence that prices of credit instruments are now reflecting fire sales or distress selling. The evidence, if anything, suggests that the prices are actually on the high side. This means that the liquidity rationale of the Keynesians has no basis in fact.

The findings are sure to be contested in the literature, as most research is. In the end, they will prove robust. They will hold up.

The debate on bank bailouts is broader than economics. It goes to a question of justice. Should one group, taxpayers, be forced to pay for the mistakes of another group, bankers? It goes to a question of freedom versus socialism and fascism. Should banks operate in a profit and loss system and bear the losses that they incur, or should they not, in which case the financial system becomes more socialist and fascist? Even before addressing these questions, if the Keynesian policy does not do what it is claimed, then in economic terms the Keynesian case falls.
The government and FED claim that the financial system lacks liquidity. They say that there is a market pricing defect or failure. This, they say, is why the bad loans (toxic assets) held by the banks are worth more than the prices that they are fetching in the market. These prices, they claim, are fire sale prices. The remedy, they call for and implement, is for the Treasury and FED to supply the banks with liquidity, i.e., bail them out. Thus, the government and the FED are directing trillions of taxpayer dollars to shore up weak banks by buying their bad loans rather than overseeing a judicial-like process of re-organizing the banks and cleaning out these loans in established bankruptcy-like procedures.

The Austrian position is that the financial system does not lack liquidity. The bad loans were overpriced to begin with, largely because the FED and government engineered a speculative bubble. The bubble burst. The loans were repriced in the market. The loans are now worth what they are bringing in the market. Thus, the government has no liquidity justification for bailing out the banks. The government’s economic rationale has no merit. Many banks are insolvent. On the economic merits, they should be allowed to fail, not bailed out.

This may seem arcane but it really does matter. Read it all–KSH.

City officials and housing advocates here and in cities as varied as Buffalo, Kansas City, Mo., and Jacksonville, Fla., say they are seeing an unsettling development: Banks are quietly declining to take possession of properties at the end of the foreclosure process, most often because the cost of the ordeal ”” from legal fees to maintenance ”” exceeds the diminishing value of the real estate.

The so-called bank walkaways rarely mean relief for the property owners, caught unaware months after the fact, and often mean additional financial burdens and bureaucratic headaches. Technically, they still owe on the mortgage, but as a practicality, rarely would a mortgage holder receive any more payments on the loan. The way mortgages are bundled and resold, it can be enormously time-consuming just trying to determine what company holds the loan on a property thought to be in foreclosure.

In Ms. James’s case, the company that was most recently servicing her loan is now defunct. Its parent company filed for bankruptcy and dissolved. And the original bank that sold her the loan said it could not find a record of it.

“It is what some of us think is the next wave of the crisis,” said Kermit Lind, a clinical professor at the Cleveland-Marshall College of Law and an expert on foreclosure law.

Read it all

The median price for an existing, single-family detached home in California sank to $247,590 in February from $418,260 a year earlier, the Los Angeles-based group said in a statement. The U.S. median price fell 16 percent during the same period, the second-biggest drop on record, according to the National Association of Realtors.

Read it all

The good news from our historical study of eight centuries of international financial crises is that, so far, they have all ended. And we confidently predict this one will end, too. We are just not quite so sure it will be nearly as soon as the chirpy forecasts coming from policymakers around the globe. The U.S. administration, for example, is now predicting that growth will renew in the latter part of this year and continue at a brisk pace of 4 percent for several years thereafter. Is this a fact-based forecast or wishful thinking?

A careful look at the international evidence on severe banking crises suggests a far more cautious assessment. The recessions that follow in the wake of big financial crises tend to last far longer than normal downturns, and to cause considerably more damage. If the United States follows the norm of recent crises, as it has until now, output may take four years to return to its pre-crisis level. Unemployment will continue to rise for three more years, reaching 11”“12 percent in 2011.

Read it all.

Aside from the president he’s the most powerful man working to save the economy, but you have never seen an interview with Ben Bernanke.

Bernanke is the chairman of the Board of Governors of the Federal Reserve System, better known as the Fed. The words of any Fed chairman cause fortunes to rise and fall and so, by tradition, chairmen of the Fed do not do interviews – that is until now.

The Federal Reserve controls the economy by setting interest rates. But after the crash of 2008, Bernanke invoked emergency powers, and with unprecedented aggressiveness has thrown a trillion dollars at the crisis.

Ben Bernanke may be the most important Fed chairman in history. The question is, can he help lead America out of this deep recession and when?

Read it all. If you have the time, I highly recommend watching the video version. I thought the chairman did well–KSH.

Update: Barry Ritholtz has comments on the interview here.

Zach is feeling the icy fingers of the recession gripping his throat. He’s a small-business man with a retail store in New York and an investment in a small apartment renovation that hasn’t gotten a buyer. Suddenly, his income is down by 25 percent or so. He has a mortgage on the house in Brooklyn where he lives that he used to be able to afford, but now he’s dipping into his savings to the tune of $2,000 or $3,000 a month to cover his costs, and he’s worried.

So he called his mortgage bank to see what might be done. The answer was: not much, certainly nothing from any government plans to help homeowners get through the crisis. And for Zach, who’s never gone to the government for anything before, there’s a larger point in that fact.

To wit: If you’ve behaved responsibly and prudently all these years, you’re on your own. But if you’ve made colossal mistakes of greed and misjudgment ”” either by selling billions in mortgages to people who couldn’t afford to pay you back or by being one of the people whose eyes were bigger than their wallets”” you might just get rescued, at the expense of taxpayers like Zach.

Read it all.

An entire nation without immediate experience or even distant memory of high finance had gazed upon the example of Wall Street and said, “We can do that.” For a brief moment it appeared that they could. In 2003, Iceland’s three biggest banks had assets of only a few billion dollars, about 100 percent of its gross domestic product. Over the next three and a half years they grew to over $140 billion and were so much greater than Iceland’s G.D.P. that it made no sense to calculate the percentage of it they accounted for. It was, as one economist put it to me, “the most rapid expansion of a banking system in the history of mankind.”

Read it all.

Supporters regard the threat of a mortgage modification in bankruptcy as a crucial tool to prod banks to negotiate with homeowners for more affordable terms. Critics argue the measure will create a flood of bankruptcy filings that ultimately will drive up mortgage rates and further destabilize the battered housing market.

Read it all.

“We won’t be rebuilding wealth so quickly,” says Christian Weller of the American Progress and the University of Massachusetts, who specializes in retirement income security.

Weller says the decline in wealth is the greatest on record.

Housing prices are expected to bottom out until mid year at the earliest. Thus far, the median price of a home is down more than 20 percent from $219,000 at the market peak in 2007 to $170,000 in January.

Stock prices, however, have fallen twice as much, some 50 percent, from their October 2007 peak.

And while a greater percentage of Americans are homeowners than investors and thus the average household’s wealth is more defined by real estate than investments, the investment outlook is still a major force.

“There are more people involved in the equity market and have wealth tied up in it than the 1980s and 1990s,” says Christopher Rupley of Bank of Tokyo-Mitsubishi.

Read it all.

All this is telling. The administration and Congress, though pledging to restore economic growth, care more about protecting foreclosure victims and promoting homeownership among the young and poor. Politics trumps economics.

—Robert Samuelson in a piece I posted this morning

How to rescue housing? The Obama administration doesn’t have a plan — or, more accurately, it has only half a plan. It presupposes that preventing or minimizing home foreclosures is a formula for revival. It isn’t.

Almost everyone agrees that a housing recovery is essential for a broader economic upswing, in part because housing’s collapse brought on the recession. Mortgage delinquencies triggered the financial crisis. Tumbling home prices (down 26 percent from their peak) ravaged consumer confidence, borrowing and spending. Since late 2007, housing-related jobs — carpenters, real estate agents, appraisers — have dropped by 1 million, a quarter of all lost jobs.

Housing’s distress is too much supply chasing too little demand. Huge inventories of unsold homes have depressed prices and construction. Given that prices rose too high in the “bubble” — homes were affordable only because credit was dispensed so recklessly — much of this painful adjustment was unavoidable. But that process should be mostly complete….

Read it all.

I mentioned this program earlier but I wanted to make sure people were aware it can be viewed online here. Very much worth the time.

Jeff Wagoner is a bankruptcy attorney in Kansas City, Mo., with the brush-cut hair and clear eyes of a former Navy aviator. From his office in a tower on a hill, he can see miles of prairie and a world of hurt. Wagoner’s clients (and he has plenty these days) range from folks who had no business ever buying a house to folks freshly fired from executive suites. Based on his survey of the economic wreckage, Wagoner’s conclusion is that even the slightest miscalculation or change in circumstances could send another customer through his door: “There are not a lot of second chances out there right now.”

We have entered the one-strike-and-you’re-out era. One lost job. One medical emergency. One bad risk or misjudgment of the heart. “I’ve seen more people lose their houses in the past year than in the previous nine years put together,” Wagoner said one recent afternoon, as gray skies hung low over the vast horizon. “It sounds crazy,” he continued, “but I’d say unless you’re making over $350,000 a year, the more you’re paid, the more vulnerable you are. If you lose a job, you’re going to have a hard time finding another that pays as much. Or maybe you need to move to find that new job, but you’re stuck with a house you can’t sell. Or maybe your marriage breaks up, and you have to liquidate your assets at today’s prices.”

In the one-strike economy, it’s not just the subprime suckers going down. Trouble stretches beyond the province of liar loans, condo-flipping and the collateralized debt obligations that no one fully understands. A hard rain now falls on the just as well as the unjust. Consumers have stopped spending, factories have stopped operating, employers have stopped hiring ”” and home values continue to fall. For millions of people, the margin between getting by and getting buried is becoming as thin and as bloody as a razor blade.

Read it all.

“Our view is the economy will continue to deteriorate sharply this quarter and next quarter and be pretty weak second quarter and maybe sort of see stability fourth quarter, and then I think you will have a pretty, and a weak 2010 although I don’t think it will keep declining”¦I think 2011 will show some growth but still be well below the levels of 2006 and 2007. My own view is you may not get back to 2006 and 2007 a long time because we have sort of an emotional and psychic shift going on in America which is back to basics don’t live on leverage, live within your means, more humble life styles, less extravagant consumption, savings and all of that sort of stuff.

I believe that a lot of people in America are legitimately scared and have seen their life savings or what they perceived as their net worth largely either wiped out or cut in half. That’s going to forge fundamental behavioral differences and that will retard the growth.”

—Stephen Allen Schwarzman, Co-Founder and CEO of The Blackstone Group during the Company’s Fourth Quarter and 2008 Year End Earnings Conference Call yesterday

Vigeland: Let’s start with a little definition. How do you define ethical behavior?

Cohen: Ethics concerns are the effects of our actions on other people. And so ethical behavior is that which has a benign effect on other people, or certainly doesn’t do harm to other people.

Vigeland: Given that definition, you know, as we’ve just heard from Nancy, there’s a lot of, shall we say, frustration out there from people who say, “Look. I did nothing wrong. I was responsible. My neighbor’s going to get a bailout. Where’s mine, even though I don’t really need it?” How are we supposed to reconcile, I guess kind of the greater good, versus individual fairness, especially when it comes to the dollars in our pockets?

Cohen: It’s an understandable feeling, but it’s a poor guide to public policy. Once you start conjuring up this Victorian notion of the undeserving poor. Look, we help people who make mistakes all the time. When someone goes to the emergency room, the doctors don’t question their moral worth, they make a medical decision. We send the fire department to someone’s house without asking why did their house catch fire? What it is to live in a community is to shoulder the burden of responding to the needs of those around you, without making moral judgments.

Vigeland: But, you know, there seems to be this notion that helping people in trouble is equivalent to rewarding them for bad behavior. But, as you said, we choose as a society to help people all the time. Why is this different?

Read or listen to it all.

Right now, the economic landscape looks like that movie of the swaying Tacoma Narrows Bridge you might have seen in a high school science class. It started swinging in small ways and then the oscillations built on one another until the whole thing was freakishly alive and the pavement looked like liquid.

A few years ago, the global economic culture began swaying. The government enabled people to buy homes they couldn’t afford. The Fed provided easy money. The Chinese sloshed in oceans of capital. The giddy upward sway produced a crushing ride down.

These oscillations are the real moral hazard. Individual responsibility doesn’t mean much in an economy like this one. We all know people who have been laid off through no fault of their own. The responsible have been punished along with the profligate.

It makes sense for the government to intervene to try to reduce the oscillation. It makes sense for government to try to restore some communal order. And the sad reality is that in these circumstances government has to spend money on precisely those sectors that have been swinging most wildly ”” housing, finance, etc. It has to help stabilize people who have been idiots.

Read it all.

When her brother could no longer help support her, Luzetta Reeves asked her small mortgage company to cut her monthly payments. It did ”” by 11 percent ”” making it possible for her to afford her house here on her modest fixed income.

In Miami, Jeffrey Mitchell saw his family income drop just as real estate taxes and insurance premiums increased, making his monthly mortgage payments crushing. He got a lower interest rate, too. But with the added fees and penalties, his monthly payment remained the same. He is now back in foreclosure.

As the Obama administration steps up efforts to help troubled homeowners modify their mortgages, it might consider the experiences of these two South Florida borrowers and their mortgage companies, one small, one large.

National statistics on mortgage modifications suggest that what happened to Ms. Reeves, a disabled 54-year-old, and Mr. Mitchell, a 42-year-old union representative, is fairly typical.

Read it all from the front page of Thursday’s New York Times

People like the gentleman profiled in this story are helping hold this country together right now–good for him. Watch it all.