We often say that investors can be bullish, bearish, or not enough of either. “Our debt is clean, we will not have to ask for help,” said Elena Salgado, Spain’s finance minister, on April 30th, appealing to the bulls. That is, if there are any bulls left in sovereign debt.

Currently, there is no shortage of bearish sentiment regarding global sovereign debt issues. In recent weeks, Greece, Portugal, and Spain have all had their credit ratings downgraded, with Greece taking on junk status. Yet despite this flurry of negative news, I would submit that investors are still not bearish enough, particularly on Spain.

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Goldman Sachs Group Inc. executives were grilled by U.S. lawmakers who compared the bank’s mortgage bankers to bookies as Senator Carl Levin asked why they sold securities the company itself called “shitty.”

“How about the fact that you sold hundreds of millions of that deal after your people knew it was a shitty deal?” the Michigan Democrat asked Daniel Sparks, who ran the bank’s mortgage unit at the time. “Does that bother you at all?”

Members of the Levin’s Permanent Subcommittee on Investigations, winding up a probe of Goldman Sachs that has lasted more than a year, used today’s hearing to pepper current and former executives with questions about their duty to clients and the ethics of betting against the housing market as the bank also sold mortgage-linked securities to customers.

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Seventy-nine percent of investors say it’s likely Goldman Sachs committed fraud – but only 39% of Americans believe the government’s investigation of Goldman is based on a legitimate concern about fraud.

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CHARLIE ROSE: Goldman also says it’s wrong in law and in fact. Where’s it wrong in law?

DAVID BOIES: Well, I think what they mean — I think what they mean is based on the facts that are in there, it’s not an illegal conduct.

The issue is whether there are more facts that would bring it under conventional law. As Michael says, this is an unusual case. This is the first time you’ve seen a case like this. I happen to think it’s no coincidence it comes out just at the time that the administration is going after the financial regulatory reform in Congress.

CHARLIE ROSE: Wait. You think the administration had some influence with the SEC in terms of bringing this complaint now?

DAVID BOIES: I think that there’s a climate in Washington that is — wants to show aggression in terms of regulation. I think that — that’s not necessarily a bad thing.

But I think you’ve got to be careful that when you bring an SEC complaint as opposed to bring a bill to change procedures or to add new regulations that you’ve got something that is improper under existing law.
And looking at the complaint, I don’t see where that is right now.

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Two years into a merciless downward spiral, Antonio Moore was threatened with living on the street.

He had lost his $75,000-a-year job as a mortgage consultant, his three-bedroom house with a Jacuzzi, his Lexus sedan. He could no longer pay even the rent on his cramped studio apartment ”” not on his $10-an-hour part-time job as a fry cook at a fast food restaurant.

Faced with eviction, he was staring last month at the imminent prospect of joining the teeming ranks of the homeless. His last hope was a new $1.5 billion federal program aimed at preventing that fate. Within days of applying, a check for $775 was on its way to Mr. Moore’s landlord, enabling him to stay ”” at least for now.

Much like the Great Depression, when millions of previously working people came to rely on a new social safety net for their sustenance, a swelling group of formerly middle-class Americans like Mr. Moore, 30, is seeking government aid for the first time. Without help, say economists, many are at risk of slipping permanently into poverty, even as economic conditions improve.

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Even as prospects for the American economy brighten, consumers are about to face a new financial burden: a sustained period of rising interest rates.

That, economists say, is the inevitable outcome of the nation’s ballooning debt and the renewed prospect of inflation as the economy recovers from the depths of the recent recession.

The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.

“Americans have assumed the roller coaster goes one way,” said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates. “It’s been a great thrill as rates descended, but now we face an extended climb.”

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The Federal Home Loan Banks are a frequently overlooked band of government-chartered cooperatives whose name screams systemic risk with every word. Federal means Uncle Sam. Homes are a declining asset. A loan is money out the door. And banks are the things that get taxpayer bailouts when they’re too big to fail and enough of their loans go bad….

Last week, the FHLBs, which is pronounced “flubs,” published their combined audited financial statements for 2009. And at first glance, it might seem like they had a profitable year. Net income was about $1.9 billion, the banks said, up 54 percent from the year before.

The most striking part about that dollar figure was what it didn’t include: About $8.8 billion of paper losses from their portfolios of mortgage-backed securities. By the banks’ own description, these losses were “other than temporary,” meaning the values of the investments aren’t expected to recover soon.

The reason those losses weren’t included in earnings? The Financial Accounting Standards Board rewrote its rules a year ago so they wouldn’t have to count, following an intense campaign by the banking industry and its friends in Congress….

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Today, the matter is far from theoretical for the 15.2 million American households holding mortgages that exceed the value of their homes. It will help determine how many of them choose to “default strategically”””that is, walk away from their mortgages even when they can afford them, because they’ve determined that it’s no longer worth it to keep paying. And that, in turn, will help determine the future health of the American housing market””and thus of the U.S. economy.

Many people think that we don’t have to worry about widespread strategic defaults. When I discussed the problem with a board member of one of the top four American banks, he categorically denied its existence: “The idea that people would walk away from their homes when they can still afford to pay the mortgage is unfounded.” A study from the Federal Reserve of Boston seems to confirm his skepticism. Evaluating Massachusetts homeowners during the 1990”“91 recession, it found that only 6.4 percent of “underwater” borrowers””that is, those burdened with mortgages that exceeded the value of their homes””ended up in foreclosure. And not all of those households were defaulting strategically; many, presumably, were actually unable to pay their mortgages.

Unfortunately, such evidence may not tell us much about the likelihood of strategic default today. During the 1990”“91 recession in Massachusetts, home prices fell just 22.7 percent from peak to trough, and most borrowers had made 20 percent down payments””so few owed much more than their houses were worth. Even people who had bought at the peak owed, on average, just 3 percent more than the value of the house. Over the last few years, by contrast, home prices have fallen by 40 to 50 percent in several areas, and many borrowers had put very little or nothing down when they bought their houses….

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By December 2005, subprime mortgages that had been issued just six months earlier were already showing atypically high delinquency rates. (It’s worth noting that even though most of these mortgages had a low two-year teaser rate, the borrowers still had early difficulty making payments.)

The market for subprime mortgages and the derivatives thereof would not begin its spectacular collapse until roughly two years after Mr. Greenspan’s speech. But the signs were all there in 2005, when a bursting of the bubble would have had far less dire consequences, and when the government could have acted to minimize the fallout.

Instead, our leaders in Washington either willfully or ignorantly aided and abetted the bubble. And even when the full extent of the financial crisis became painfully clear early in 2007, the Federal Reserve chairman, the Treasury secretary, the president and senior members of Congress repeatedly underestimated the severity of the problem, ultimately leaving themselves with only one policy tool ”” the epic and unfair taxpayer-financed bailouts. Now, in exchange for that extra year or two of consumer bliss we all enjoyed, our children and our children’s children will suffer terrible financial consequences.

It did not have to be this way. And at this point there is no reason to reflexively dismiss the analysis of those who foresaw the crisis. Mr. Greenspan should use his substantial intellect and unsurpassed knowledge of government to ascertain and explain exactly how he and other officials missed the boat. If the mistakes were properly outlined, that might both inform Congress’s efforts to improve financial regulation and help keep future Fed chairmen from making the same errors again.

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Despite a real estate implosion, property tax revenue collected by states and localities actually rose 2.7% last year to $421.8 billion.

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Obama administration officials on Friday ramped up their attempts to help struggling homeowners, announcing major changes to the government’s much-criticized $75-billion program to modify mortgages to avoid foreclosures.

The most significant change is a set of complex new incentives for banks and investors to reduce the principal on so-called underwater mortgages — loans for homes now worth less than what is owed.

In addition, the administration announced that many unemployed homeowners could receive three to six months of reduced mortgage payments while they look for a job.

Together, the revisions are designed to spur the Home Affordable Modification Program to reach its target of helping 3 million to 4 million homeowners avoid foreclosure through 2012.

While the changes are significant to a year-old program that so far has helped just 170,000 homeowners receive permanently lowered mortgage payments, administration officials stressed they would only make a dent in the projected 10 million to 20 million foreclosures expected in the next three years.

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The net results of the credit bubble are as follows:

1) An enormous number of families living in homes they cannot afford.

2) Bank balance sheets laden with current bad loans and lots of potential future defaulting loans.

3) Real Estate Sales, despite being propped up with historic low mortgage rates and tax purchase credits, are continuing to slide.

4) A weak overall economy with a very slow, soft recovery.

Whether a function of populist politics or bad economics, the proposals so far appear to address items one and three. But upon closer examination, they do nothing of the kind. In fact, they are actually gaming the system to help issue two ”” the bad loans the banks are carrying.

Even worse, they are making issue #4 ”” the economy ”” increasingly problematic.

We should allow the real estate market to experience a healthy price normalization process. Even though home prices have fallen dramatically, they have yet to reach their historical means relative to income or the cost of renting. This is to say nothing of the usual careening past the median towards under-valuation that typically follows a massive mis-allocation of capital.

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As a published author even before he graduated from Duke Divinity School in 2006, many might have expected Jonathan Wilson-Hartgrove to move to a bigger city with brighter job prospects.

But instead, Wilson-Hartgrove and his wife, Leah, have dug their heels into the floorboards of a sagging 11/2-story bungalow in the Walltown neighborhood of Durham, where they have lived for the past seven years. The Wilson-Hartgroves have no plans to move, either.

In his new book, “The Wisdom of Stability: Rooting Faith in a Mobile Culture” (Paraclete Press), he explains why.

“We felt that by moving again and again we could get to a place where you dig 10 wells 3 feet deep and never strike water,” said Wilson-Hartgrove, 29.

The Wilson-Hartgroves see stability as a virtue. The couple consider themselves modern-day monks, devoted to a religious community of like-minded people who practice prayer, contemplation and works of justice.

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Under pressure by Massachusetts prosecutors, Bank of America Corp. said Wednesday it would reduce mortgage-loan balances as much as 30% for thousands of troubled borrowers, in what could presage a wider government effort to encourage banks to offer debt reduction to ease the mortgage crisis.

The plan is one of the boldest moves yet to address the plight of millions of U.S. homeowners who are “under water,” owing more on their homes than they’re worth. It could make it easier for the Obama administration to move in a similar direction with its existing loan-modification program, although senior government officials and many bankers remain very wary of offering to cut loan balances as the main way of helping distressed borrowers.

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There are basically two kinds of homeowners on Dana Lane ”” those who bought high like the Sandovals, and those who had been there awhile and saw their equity ballooning until it stopped.

“Like everybody else, I’m in an upside-down loan,” says Brenda Moore, who owes more than $300,000 on her mortgage. This is remarkable considering she bought her house in 1989 for $80,000. A search of public records reveals that Moore, a retired nurse, has refinanced her home eight times since 1998.

The loans are from a who’s who of subprime lenders. With each loan she took out more equity, and each time the loan terms got worse.

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Around 37% of all borrowers with 30-year conforming fixed-rate mortgages””who collectively hold about $1.2 trillion of home loans””have mortgage rates of 6% or higher, according to investment bank Credit Suisse. Many could reduce their rates by a full percentage point if they refinanced at current rates, about 5%. More than half could lower their rates nearly three-quarters of a percentage point, according to Credit Suisse.

But new refinance applications in January stood near their lowest levels in the past year. Weekly data compiled by the Mortgage Bankers Association also show that refinance activity has been muted, considering that rates are so low…

The last time mortgage rates were at current levels, in 2003, refinancing activity hit $2.9 trillion, according to trade publication Inside Mortgage Finance. Last year, refinance volume reached $1.2 trillion, the highest amount since 2003 but not nearly as much as expected, considering how low interest rates have fallen.

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Our largest operation in this sector is Clayton Homes, the country’s leading producer of modular and manufactured homes. Clayton was not always number one: A decade ago the three leading manufacturers were Fleetwood, Champion and Oakwood, which together accounted for 44% of the output of the industry. All have since gone bankrupt. Total industry output, meanwhile, has fallen from 382,000 units in 1999 to 60,000 units in 2009.

The industry is in shambles for two reasons, the first of which must be lived with if the U.S. economy is to recover. This reason concerns U.S. housing starts (including apartment units). In 2009, starts were 554,000, by far the lowest number in the 50 years for which we have data. Paradoxically, this is good news.

People thought it was good news a few years back when housing starts ”“ the supply side of the picture ”“ were running about two million annually. But household formations ”“ the demand side ”“ only amounted to about 1.2 million. After a few years of such imbalances, the country unsurprisingly ended up with far too many houses.

There were three ways to cure this overhang: (1) blow up a lot of houses, a tactic similar to the destruction of autos that occurred with the “cash-for-clunkers” program; (2) speed up household formations by, say, encouraging teenagers to cohabitate, a program not likely to suffer from a lack of volunteers or; (3) reduce new housing starts to a number far below the rate of household formations.

Our country has wisely selected the third option, which means that within a year or so residential housing problems should largely be behind us, the exceptions being only high-value houses and those in certain localities where overbuilding was particularly egregious. Prices will remain far below “bubble” levels, of course, but for every seller (or lender) hurt by this there will be a buyer who benefits. Indeed, many families that couldn’t afford to buy an appropriate home a few years ago now find it well within their means because the bubble burst.

Ponder that first set of numbers for a moment. Ten years ago total manufactured homes industry output was more than 600% higher than it was last year. Can you say overbuilt? Read the rest–KSH.

In an interview with property magazine Estates Gazette just a month after the Church of England wrote of its £40m investment in the project Joseph Cannon, chief surveyor, said that while the episode was “painful” much of the criticism levelled at the Church was undeserved.

“The loss of our investment in Stuyvesant Town is very unpleasant and clearly not something we would ever have wished for. But painful as it has been, we have been able to absorb it and it has not knocked us off strategic course in any way,” he said.

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Take a look.

….Elkhart also symbolizes the failure of federal efforts to turn around the housing slump at the heart of the economic crisis. Housing in this community has become almost entirely dependent on a string of federal support programs, which are nonetheless failing to prevent a fall in prices and a rise in mortgage delinquencies.

More than one in 10 mortgage holders in Elkhart is seriously behind on payments. The median sales price has plunged to the level of a decade ago. Many homeowners owe more than their home is worth, freezing them in place for years. Foreclosures recently hit a record.

To the extent that the real estate market is functioning at all, people here say, it is doing so only because of the emergency programs, which have pushed down interest rates on mortgages and offered buyers a substantial tax credit.

Equally important is an expanded mortgage insurance program run by the Federal Housing Administration, which encourages private lenders to accept borrowers with small down payments. The government takes the risk of default.

A few years ago, only one in 10 buyers in Elkhart used the housing agency program. Now about half do. Across the country, the agency has greatly expanded its reach so that it now insures six million mortgages.

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Myers Park, a historic neighborhood in Charlotte, N.C., has wide, tree-lined streets, sweeping lawns and historic mansions worth millions. It’s the kind of neighborhood where people take pride in the pedigree of their homes.

But Myers Park is also struggling with a racial legacy that plagues many communities across the country: discriminatory language written into original home deeds. The restrictions are no longer enforceable, but the words are a painful reminder of history.

The deed on homeowner John Williford’s 75-year-old Myers Park house includes restrictions written by the original developers geared to preserve the parklike feel of the neighborhood. The deeds also include racial restrictions: “This lot shall be owned and occupied by people of the Caucasian race only.”

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In 2006, Benjamin Koellmann bought a condominium in Miami Beach. By his calculation, it will be about the year 2025 before he can sell his modest home for what he paid. Or maybe 2040.

“People like me are beginning to feel like suckers,” Mr. Koellmann said. “Why not let it go in default and rent a better place for less?”

After three years of plunging real estate values, after the bailouts of the bankers and the revival of their million-dollar bonuses, after the Obama administration’s loan modification plan raised the expectations of many but satisfied only a few, a large group of distressed homeowners is wondering the same thing.

New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying.

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It is payback time for Fannie Mae and Freddie Mac on some mortgages sold to the finance companies by lenders.

Stuck with about $300 billion in loans to borrowers at least 90 days behind on payments, Fannie and Freddie have unleashed armies of auditors and other employees to sift through mortgage files for proof of underwriting flaws. The two mortgage-finance companies are flexing their muscles to force banks to repurchase loans found to contain improper documentation about a borrower’s income or outright lies.

The result: Freddie Mac required lenders to buy back $2.7 billion of loans in the first nine months of 2009, a 125% jump from $1.2 billion a year earlier. Fannie Mae won’t disclose its figure, but trade publication Inside Mortgage Finance said Fannie made $4.3 billion in loan-repurchase requests in the first nine months of 2009.

“Because taxpayers are involved, we’re being very vigilant,” said Maria Brewster, who oversees Fannie’s repurchase team. “No taxpayer should have to pay for a business decision that caused a bad loan to be sold to Fannie Mae.”

Read it all from the weekend Wall Street Journal.

As the CBO notes, Fannie and Freddie “purchase mortgages at above-market prices,” driving down interest rates and passing some of the savings to home buyers. That subsidy is felt right away, but the risks in providing it are stored up over time, and their real costs may not be felt for years or even decades””as was the case in the years leading up to their spectacular collapse in 2008.

Yet this is precisely the fiction that the Obama Administration seeks to preserve by keeping the cost of Fan and Fred off the government’s books. The Administration’s budget accounting assumes Fannie and Freddie are private companies. So under its preferred treatment, the only recognized cost to taxpayers is the money that is being pumped in to keep them afloat””$110 billion so far.

That’s plenty as it is, but in the wake of their government takeover, there is no justification for pretending that their risks aren’t taxpayer risks. This is all the more true with the likes of New York Senator Chuck Schumer giving the companies marching orders to rescue tenants in the Stuyvesant Town development in Manhattan.

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Obama’s economic team could have raised the limits on how much mortgage securities Fannie and Freddie can buy, allowing those firms to replace the Fed’s purchasing program. But Barr said the administration thinks the mortgage business will stand on its own without such special assistance, similar to the way the nation’s biggest banks weaned themselves off federal bailout funds by raising private capital.

“The basic goal is to implement a gradual process where the government’s role in the economy goes down,” Barr said. “It has to be consistent with the basic goal of stability, but it is appropriate.”

Administration and Fed officials expressed confidence that rates will rise only modestly — perhaps a quarter of a percentage point. They attribute their optimism to the lengthy notice they have given the market. The markets already should have anticipated the government’s exit by adjusting interest rates higher. Yet mortgage rates have been falling slightly the past few weeks.

The optimism at the White House and the Fed, however, is not shared across the government. A few senior policymakers at the central bank view the economic recovery as still too fragile, suggesting that purchases perhaps should expand further. These dissenters also warn that mortgage rates could shoot up, perhaps to 6 percent or higher, because private investors buying securities would demand a greater rate of return than the Fed. To reach it, lenders may have to raise rates for consumers.

“Presumably, there is pent-up demand from the private sector, but the question is: At what rate are they going to be interested?” said Eric S. Rosengren, the president of the Federal Reserve Bank of Boston, who has indicated that he supports expanding the Fed’s mortgage securities purchase program.

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The Church of England has lost £40m after a New York apartment complex deal it had invested in turned sour.

In June 2007, when the property market was at its peak and the credit crunch was yet to arrive, the Church made investments in Stuyvesant Town and Peter Cooper Village, two Manhattan housing estates situated along the New York’s East River. But the projects incurred huge debts and collapsed when the US property bubble burst next year.

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Morality aside, there are other factors deterring “strategic defaults,” whether in recourse or nonrecourse states. These include the economic and emotional costs of giving up one’s home and moving, the perceived social stigma of defaulting, and a serious hit to a borrower’s credit rating. Still, if they added up these costs, many households might find them to be far less than the cost of paying off an underwater mortgage.

An important implication is that we could be facing another wave of foreclosures, spurred less by spells of unemployment and more by strategic thinking. Research shows that bankruptcies and foreclosures are “contagious.” People are less likely to think it’s immoral to walk away from their home if they know others who have done so. And if enough people do it, the stigma begins to erode.

A spurt of strategic defaults in a neighborhood might also reduce some other psychic costs. For example, defaulting is more attractive if I can rent a nearby house that is much like mine (whose owner has also defaulted) without taking my children away from their friends and their school.

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What about the future? The problem in the job market going forward is not so much layoffs in the private sector, which are abating, but a lack of hiring. The federal stimulus program is offset by a 2010 budget shortfall for state, city, county and school districts, which the Center on Budget and Policy Priorities recently estimated will be in the range of an astonishing $200 billion nationally. Since virtually all states and cities have to run balanced budgets, the result will be reduced services, layoffs and tax hikes.

The consequence is that the U.S. economy””for decades the greatest job creation machine in the world””is taking longer and longer to replace the jobs already lost. In the 1970s and 1980s, Jane Sasseen noted in a recent report in BusinessWeek, it took as little as one year from the end of a recession to add back the lost jobs. After the eight-month downturn ending in March of 1991, for example, jobs came back in 23 months. After the downturn from the dot-com bust in 2001, it took 31 months. This time it could take as many as five years or even more to recover all of the eight-plus million jobs lost since March 2007. That’s because we would have to create an additional 1.7 million jobs annually beyond those for the 1.3 million new people who enter the work force every year.

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Not just once but twice in as many days, news media have used the word “unexpectedly” to describe serious economic bad news in the housing industry. Yesterday, CNBC used it to report on homebuilder sentiment as housing sales fall and foreclosures rise. And unemployment has builders wondering when they can expect to start selling houses again at all….

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