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The other day, my buddy and I were talking about the housing crisis and "the great unwind." Everyone from Jim Cramer to Bill Gross believes markets cannot turn around until we find the bottom in housing. We are all so nervous about asset deflation that nobody wants to own anything. The housing market, in particular, is in paralysis. Policymakers have the seemingly competing aims of "protecting the homeowner" and "getting the securitization market functioning again."
There are several issues associated with the securitization market and problems the "bad bank" will have that I will address in a subsequent piece -- so let's look more directly at the root of the problem: stemming further home price declines and keeping people in their homes. On this topic, my buddy remarked, "What I don't get is who exactly are these homeowners we're trying to save? Most of the problem loans over the past three or four years are from people that never really 'owned' anything."
What he meant was that many of these home purchasers took out an 80% first loan and maybe a 10%, 15% or even a 20% second -- they had very little equity in these homes to begin with given the frothy credit market. (For what it's worth, it would be really interesting to see how much equity has been in/was ever in all these foreclosed homes.) And once the real estate broker commission is figured in, marking on the "bid side," virtually any equity is wiped out. And I am not even talking about the folks who took out "liar loans."
Before I get into the solution, I have to say that everyone seems to be looking for someone to blame in this crisis. But nearly everyone involved in the process has culpability, so let's stop for a minute with the blame assessment and focus on solving this conundrum that we have dragged the entire world into.
OK, so the issue is, how do we stop home prices from going down? How do we stem all of these foreclosures? My friend asked the key question: "What's so big about homeownership, anyway?" He's got a point -- other than those in the industry, who made money on real estate the last five years? And it will be a while before we recoup those lofty levels achieved earlier this decade ... longer if we don't find a bottom soon. Many who bought in recent years would probably like to just walk away. So, why don't they? Simple -- because they have to live somewhere.