Housing Remains at Heart of Credit Woes

The National Association of Homebuilders Housing Market Index hit a record low of nine. This number pivots around 50. Above 50 is good and below 50 is bad. Nine is the all-time super record low. An index of buyer traffic fell to seven, which you can read as "why bother to even look." I don't think you can go negative but I sure don't want to find out. While the data was compiled during the presidential election, it was more likely influenced by the stock market and credit crisis.

We can talk all we want about the Troubled Asset Relief Program and who should get under that umbrella. Or we can talk about General Motors (GM - commentary - Cramer's Take) and the pros and cons of a bailout. But the underlying root cause of all the credit woes started with, and still resides in, the housing market. Gretchen Morgenson wrote in last Sunday's New York Times about the $1.5 trillion of subprime and Alt-A (those are the liar loans) mortgages that are in securitized trusts. The banks (Citigroup (C - commentary - Cramer's Take), JPMorgan (JPM - commentary - Cramer's Take), Bank of America (BAC - commentary - Cramer's Take)) have launched restructuring efforts for those mortgages they own, but the mortgages that have been securitized are by far the bulk of the underwater loans and need to be addressed.

The Securities Industry and Financial Markets Association figures that $400 billion of the $1.5 trillion mortgages have defaulted, so presumably they have been written down. About $250 billion will reset their interest rate in 2009 and another $700 billion in 2010. If they are not on the verge of default now, they will be ever closer when the resets come. Morgenson quotes a potential refinancing plan that has some merits.

Rather than be an advocate for one plan or another, the point I would like to make is that we have to recognize the losses in these portfolios, take them, and move on. When Japan entered its "Lost Decade," which went on forever, it was "lost" because they kept bad loans on the books and refused to write them down. Banks hoarded capital, new lending stalled, and everyone waited for something to magically happen. It didn't work, and it won't work now if we don't address the issue head-on.

Whether we have a program to share the loss, stick it to the government, or whatever, there will be no escaping that the losses are there. Whatever solution is arrived at will be unfair to all those who struggle to pay their mortgage bill while others get renegotiated, but it will be more unfair to not forge a solution and get the economy restarted.

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Know What You Own: Farrell mentioned General Motors. Other automakers are Ford (F - commentary - Cramer's Take), Toyota (TM - commentary - Cramer's Take) and Honda.

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Vincent Farrell Jr. is chief investment officer for Soleil Securities Group and a regular guest on CNBC and other national print and broadcast media.

Prior to joining Soleil in August 2008, Farrell was a principal of Scotsman Capital Management. Before that, he was chairman of Victory Capital Management of Cleveland and chairman of Victory SBSF Capital Management in New York. He was a founding partner of Spears Benzak Salomon & Farrell, which was acquired by KeyCorp in 1995. Vince held a variety of positions in his 23 years at SBSF, including chief investment officer, and he served as the portfolio manager on a number of the firm's largest client relationships.

Prior to joining SBSF, Vince spent nine years at Smith Barney as a vice president, sales.

Vince graduated from Princeton University in 1969 and received his MBA from the Iona College Graduate School of Business in 1972.