This post first appeared in the November edition of Cirios Trends: Getting to the Bottom of the Housing Market

Of the myriad debates ongoing at a time when economics and
politics are seemingly two heads of the same freakish snake, the role government should play in directing economic actions dominates an already ideologically charged arena.

And nowhere is the issue argued more hotly than in the trenches of the housing market.

Government, some say, should come to the rescue of Main Street, vindicating the evils of Wall Street greed and excess run amok. Who else will look out for the little guy if not our elected representatives?

Others disagree, fingering Washington as one of the primary culprits in an economic landscape characterized by artificially low interest rates, lax regulation and a political class that was in bed with the corporations it claimed to be policing.

In housing, it’s no secret that government involvement in the market has reached new heights. Virtually every mortgage written today is backed by some branch of the federal government, be it via the FHA, Fannie Mae or Freddie Mac. Tax credits to first time buyers spurred a flurry of purchase transactions this summer and fall, and inventory levels have been kept low by ongoing foreclosure moratoria.

Interest rates remain stubbornly low, despite fears of inflation and a collapsing US currency.

As a result, in some of the hardest hit real estate markets, prices seem to have stabilized, as supply has dropped to, in some cases, less than a month of inventory.

At the heart of the debate, and a point which is widely under-reported in the mainstream press, is the effect of decades of aggressive policies aimed at encouraging lower income Americans to buy homes.

These directives created a deeply liquid and profitable arena into which Wall Street moved, seized upon, and ultimately cannibalized. That Congress is now actively leading a witch hunt to track down the “guilty” is highly ironic since only with the implicit blessing of Washington could Wall Street have committed its crimes.

Look at the graph in the top right corner of this page. Taxpayers are increasingly being asked to cover losses which Washington is unloading from the private sector onto the public balance sheet. This liability will be a drag on the economy for years to come.

One unfortunate result of this crisis is that Americans with less than ideal credit are seeing access to banking services stripped away at an alarming rate. And while justified in some cases, there is a place in our economy for non-prime lending, if done right.

As big banks withdraw from this arena, smarting from losses of a similar shape to the graph above, small, niche lenders can step in and fill the void. Opportunities abound, if you just know where to look.

By ANDREW JEFFERY

This post first appeared on Minyanville.

For almost 2 years, we’ve been told government-backed loan modification efforts and foreclosure moratoriums would help ease the pain of the ongoing housing crisis. It’s not working.

Despite recent calls to the contrary — this morning’s came courtesy of real-estate mogul Sam Zell — residential home prices are still in free fall, and the bottom will remain elusive.

Picking up a trend noted weeks ago by housing blogs and other real-estate analysts, the Wall Street Journal reports banks and mortgage-servicing companies are pushing through foreclosures at the fastest rate in more than a year.

JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC), 3 of the country’s biggest loan servicers, scaled back foreclosure efforts in recent months at the request of the Obama Administration. Now, with the bans lifted, a new wave of repossessions are simply a matter of time. In California, notices of default and trustee sale, which precede foreclosures, spiked in March as moratoriums expired and lenders returned to “business as usual.”

Banks, especially those collecting payments on behalf of Fannie Mae (FNM) and Freddie Mac (FRE), say they’re doing everything they can to keep borrowers in their homes. But according to GMAC (GM), as few as 10% of struggling homeowners qualify for the Obama Administration’s highly touted foreclosure prevention program.

The logical conclusion is that this new wave of bank owned homes being dumped onto the market will put even more downward pressure on housing prices. And while this is true on a localized, market by market level, widely monitored home price indicators may not tell the whole story.

As noted by the Field Check Group, a real-estate analysis firm, delinquencies on jumbo loans are rising at an alarming rate. This is consistent with trends we have been seeing over the past 6-9 months as prime defaults are now rising faster than subprime.

Currently, low-end, inexpensive homes dominate sales data, dragging down median and average prices. Foreclosures, however, are creeping into high-end markets, and coupled with high levels of inventory and weak demand, prices are tumbling. As forced sales become more prevalent and transactions rise in these well-to-do areas, expensive home sales will begin to represent a larger portion of transactions used in broad measures of prices.

In the coming months, we could see home price measures falling at a less severe rate as the data mix becomes less skewed towards the low end. The bottom will be cheered, recovery will be lauded by the spin machine known as the National Association of Realtors, and buyers around the country will be lured into a false sense of security that housing has finally hit rock bottom.

Meanwhile, back in reality, property values — actual homes, rather than statistics — will keep sliding.

This post first appeared on Minyanville.

The mortgage bailout parade marches on.

Just days after rival Bank of America (BAC) announced plans to modify hundreds of thousands of mortgages, JPMorgan (JPM) released details of a homeowner rescue plan of its own on Friday afternoon.

Following its takeover of both Bear Stearns and Washington Mutual, JPMorgan’s inventory of distressed mortgages has risen dramatically in the last 8 months. The bank’s modification efforts, which mirror Bank of America’s plan, are focused largely on subprime loans and option ARMs. The acquisition of WaMu saddled CEO Jamie Dimon’s firms with billions of these loans - $16 and $54 billion, respectively, according to the Wall Street Journal.

JPMorgan plans to identify borrowers with both the willingness and ability to pay, lower interest rates and, in some cases, forgive loan principal. For Option ARMs, borrowers may have the opportunity to replace their negatively amortizing mortgage with a safer, fixed rate 30-year loan.

Look out for more of these plans coming from the remaining big American banks, particularly Wells Fargo (WFC): Its recent acquisition of Wachovia (WB) included the Charlotte-based bank’s massive option ARM portfolio.

The plan is certainly a step in the right direction. It’s nice to see that some of the recent $25 billion injection from the government will be funneled toward the taxpayers that ponied up the money in the first place.

Both JPMorgan and Bank of America’s new programs, are, however, evidence of the government’s – and banks’ — inclination to deal with problems that already exist, rather than ones that are on the horizon.