This post first appeared on Minyanville.

The Obama administration is busy touting the burgeoning success of its mortgage modification program. Unfortunately, it’s a farce: Out of one side of his mouth, the President touts a dedication to the besieged middle class, while from the other, lauds a loan modification program which steals money from struggling homeowners in favor of banks — already the recipients of billions in taxpayer-funded bailouts.

The ploy would be amusingly hypocritical if it weren’t so sad.

According to the Wall Street Journal, the Treasury Department claims that the Home Affordable Modification Program, or HAMP, has begun more than 650,000 so-called “trial modifications” since its inception this February. The commonplace explanation for the latest in a host of failed mortgage modification schemes is that it’s a natural first step to getting struggling borrowers back on the regular monthly payment track.

HAMP mandates that in order to qualify for a permanent loan modification, borrowers must first complete a trial period of three months with lower payments, in addition to submitting the proper documentation required for a more permanent solution. On the surface, this seems logical, even fair: Only after a show of good faith should homeowners be allowed a second chance.

Lenders like Wells Fargo (WFC), Bank of America (BAC), JPMorgan Chase (JPM), and Citibank (C), however, are required to show no similar evidence of good faith.

And I’ve yet to read a news story that accurately describes how this program works: Even as banks ask borrowers to cough up monthly payments on a house that’s likely to be hopelessly underwater, the foreclosure process continues.

Notices of default turn into notices of trustee sale, which turn into trustee sales, which turn into repossessions and eventually evictions. Meanwhile, as the homeowner is given a false sense of security that scraping together payments each month could save his house, lenders are under no obligation to grant a stay of foreclosure.

In other words, banks determined to take a loan through the foreclosure process can easily — and with Washington’s blessing — grant a trial modification which allows them to pinch a final three months of payments from homeowners already on the verge of financial insolvency, while offering nothing more than an empty promise in return.

To be sure, many of these homeowners got themselves in over their heads by overextending their debt load on an overpriced home. Foreclosure, in some cases, is a reasonable solution.

But an initiative touted as a long-awaited success in the battle against foreclosures is in fact just another way for Washington to redirect money from the pockets of ordinary Americans — however economically downtrodden — to big banks surviving solely by suckling the government teat.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Mortgage guidelines have become increasingly strict — not to mention regimented — as the private secondary-mortgage market has all but disappeared in the past 24 months. But according to the Wall Street Journal, appraisals are increasingly becoming one of the biggest hurdles for new purchase and refinance transactions.

In the wake of the recent collapse in home prices, appraisers have come under fire for bowing to lender demands during the boom, offering up property values more aligned with lenders’ wishes than with reality. In 2007, the state of New York sued Washington Mutual — now owned by JPMorgan (JPM) — for colluding with a subsidiary of First American Corporation to overinflate home values.

Collusion between appraisers and mortgage brokers, real-estate agents, banks, and borrowers helped fuel runaway price appreciation. In response, Fannie Mae (FNM) and Freddie Mac (FRE) — the 2 government-owned giants that control around two-thirds of the mortgage market — issued new guidelines dictating how lenders can select and evaluate appraisals. The new policies went into effect May 1.

To help facilitate the new, tighter rules, lenders are using appraisal management companies, or AMCs, which employ networks of appraisers around the country to provide what purport to be unbiased value analysis. All this, of course, comes at a cost which is ultimately borne by borrowers.

And, in what could be considered ironic if it weren’t so repellent, appraisers are crying foul.

This from a group whose moral backbone during the housing boom most closely resembled that of a jellyfish – one seemingly incapable of preventing its members from being wooed by banks into committing fraud.

An appraisal is simply one person’s opinion of a home’s value on a given day. And although that person is licensed to provide such an opinion, the very nature of an appraisal renders its usefulness as a true risk management tool questionable at best.

The growing use of AMCs, opponents argue, reduces appraisal quality even as it increases costs. Appraisers are selected based on proprietary quality scoring mechanisms employed by each AMC, which may or may not be a good measure of reliability. And since AMCs take on average a 40% cut on the total appraisal fees and lenders demand quick turnaround, appraisers are working for less on a tighter timeline.

Sure, fraud may be reduced, but incompetence could more than make up for that as AMCs scramble to employ barely capable appraisers in order to ensure complete geographic coverage for their clients.

The real losers in all this — as is the case when poorly conceived regulation is aimed at making up for past mistakes without proper consideration for the root cause of those mistakes — are homeowners, who must now pay more for a property valuation mechanism that isn’t likely to be much better than the old one.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Simply put: There are too many homes in America.

Travel to the outskirts of Phoenix, California’s inland empire — or even suburban Washington, DC — and you’ll find scores of vacant homes, for-sale signs, and soon-to-be ghost towns. Sprawling Lennar (LEN) cookie-cutter developments, Pulte Home (PHM) condos jammed against freeway sound barriers, mostly vacant strip malls – these are not the relics of dynamic social progress.

There are many who believe that superfluous developments in the so-called exurbs must be razed for housing supply to return to anything like sustainable levels.

But few expect the bulldozers to reach the urban downtown. Just as the “subprime” mortgage problem began in areas where economic fundamentals fell hopelessly out of sync with home prices, so too will urban renewal rise from the ashes of these communities.

Take Flint, Michigan, a city looking to shrink itself just to stay alive.

This once-proud industrial town 65 miles north of Detroit is embracing a trend which may eventually spread to cities throughout the United States: In response to seemingly endless economic woes, government officials in Flint are considering hastening the town’s decline in order to rebuild anew.

The New York Times reports that city leaders have floated a plan whereby certain dilapidated neighborhoods would be razed to the ground, consolidating residents and businesses closer to downtown. The aim is to reorganize the population around fewer, more sustainable communities, thereby pushing run-down homes and empty lots to the outskirts of town.

While uprooting citizens is a prickly political topic, the county Treasurer and advocate of the shrinking of Flint grimly noted that “Not everyone’s going to win. But now, everyone’s losing.”

Foreclosures, the latest in a series of economic epidemics to sweep Flint, are causing formerly vibrant communities to turn to dust. Genesee County, of which Flint is the largest town, in addition to Indianapolis and Little Rock, Arkansas, are tackling the foreclosure issue with county land banks. These publicly-funded institutions buy unwanted properties and rehabilitate them before squatters and vandals can take over.

Contrast this government-led form of community development with the policies now operative at Wells Fargo (WFC), Citigroup (C) and Bank of America (BAC) to leave bank owned homes vacant and ripe for vandalism, and you have an example of government policy that can speed up the recovery of a local real estate market.

And while Flint’s situation may be unique in that it faces the twin headwinds of the auto industry’s demise and the ongoing housing market collapse, it’s root troubles are emblematic of towns across the country: Cities, expectant of growth that never came, supported development that proved unsustainable.

Myriad solutions have been proposed to solve this country’s housing nightmare, but the simplest, and indeed the most effective may be to simply reduce supply the old-fashioned way, with bulldozers.

By ANDREW JEFFERY

This post first appeared on Minyanville.

While pundits and politicians debate the various aspects of President Obama’s $275 billion housing bailout, one piece of data proves just how misguided federal efforts to revitalize the housing market are: $275 billion could buy more than half of all American homes already in foreclosure.

Such an undertaking would remove distressed homes from the market and spur community revitalization efforts throughout areas desperately in need of the hope they were promised in November.

According to real-estate analytics website Realtytrac.com, foreclosures were filed on 2,330,483 homes in 2008, up 83% from the year before. The median home price in the US is $180,100 - which means 1,526,929 of those homes could be bought with $275 billion. And since foreclosures are centered primarily in areas with low home values, the true number of properties the bailout money could be used to buy is likely much higher.

While the logistics for such an outrageously common-sense solution to the nation’s housing woes are daunting, they’re no less challenging than the massive loan modification efforts already in place. And their results continue to prove underwhelming, at best.

Such a solution also addresses the rapidly mounting discontent over bailing out those homeowners who made bad decisions. Distressed borrowers wouldn’t directly receive any taxpayer money – though they would indirectly benefit from the massive government expenditure in their community.

Cash would be funneled down to the local level, where cities and counties could more effectively distribute it. To be sure, local governments can be as bureaucratic and inefficient as Washington — not to say corrupt – but by allocating capital to localities, each community would be responsible for its own clean-up efforts.

Private investors, developers, nonprofits and real-estate professionals could compete for business, adding a free-market component to rescue efforts – and even spurring a little sorely-needed economic activity.

Some cities aren’t content to wait for federal money to trickle down from the White House. Menlo Park, California, best known for its devotion to the bubble lifestyle, is considering using city money to buy and refurbish foreclosed homes.

The town, like many others in America, is split by a highway that acts as a major dividing line between the haves and the have-nots. While there are just 97 homes in foreclosure in Menlo Park, the vast majority are on “the other side of the tracks,” away from the mansions and quiet, tree-lined streets of West Menlo. The proposal will use money from a $2 million fund already seeded by developers who opted not to allocate units for low-income housing.

The city plans to tap Habitat for Humanity to refurbish the homes, using community volunteers and local experts to oversee the improvements. The president of the local Homeowners Association, Ash Vasudeva, said “When rehabilitation is going on, it uplifts the entire community.” A simple statement, but true.

And while this is one small city undertaking one small project, it could serve as a model for other communities around the country. Not to mention the fact that the mere announcement of $275 billion in real-estate investments would hasten the price discovery the housing market so sorely needs.

Furthermore, banks stand to gain little from such a use of public funds – which could be why such a plan has yet to be proposed on Capitol Hill. When a bank forecloses on a home, JPMorgan Chase (JPM), Wells Fargo (WFC) or Citigroup (C) is forced to write the asset down to at least the amount of the outstanding loan. But since most properties are worth far less than the loan amount, selling the property at market prices would require further writedowns.

So, as banks soak up billions in bailout money under the auspices of massive loan modification efforts aimed at stemming foreclosures, vacant homes lay in disrepair, vagrants loot the pipes – and communities continue to deteriorate.

But instead of allocating funds for such grassroots efforts, Washington continues to issue broad, vague orders aimed at helping many, but in very small amounts. Such programs have failed before, and they’ll fail again.

Maybe it’s time for a new approach.