This post first appeared on Minyanville.

In early 2006, when subprime powerhouse New Century went bust, vulture investors began to salivate at the opportunities a collapsing mortgage market would offer up like manna from the trading gods. They started raising money. And lots of it.

Billions were poured into so-called “mortgage opportunity funds,” which planned to pick through the wreckage of the once-high-flying housing market. Some investors aimed to focus on mortgage-backed securities, hoping to buy in at pennies on the dollar so just a few bond payments would reap sizable returns. Others, however, delved into the realm of whole loans, buying troubled mortgages from floundering banks.

As noted in the Wall Street Journal this morning, an investment strategy that seemed like a slam dunk on paper — buying distressed mortgages on the cheap, and working out equitable arrangements with borrowers — has proven extremely difficult to execute.

The prevailing wisdom was that, as delinquencies rose, and banks amassed a seemingly limitless portfolio of troubled loans, the likes of JP Morgan Chase (JPM), Bank of America (BAC) and Citigroup (C) would be forced to unload assets at firesale prices. Because they were buying at super-low prices, investors expected to have the necessary cushion to forgive principal, lower interest rates, or otherwise get borrowers back on track. They would, of course, earn a hefty profit for the effort.

But the housing market, which tumbled further and faster than all but the most pessimistic experts thought possible, had other plans.

Throughout 2007, any player that dipped a toe into the market lost a foot. Property value declines accelerated, securities prices tumbled, and economic conditions continued to deteriorate. Sellers, hoping for a rebound, were reluctant to accept lowball prices. Few trades were executed, and the lack of liquidity drove the market to new lows.

Then, in 2008, as delinquencies began to spread from the subprime to the prime market, home prices continued to slide, and it became clear there would be no easy fix to the housing market’s woes, big banks recognized their need to raise capital by selling assets.

The market for distressed loans began to flourish as liquidity entered the market: Sellers accepted painfully low prices, and investors started deploying more capital. Prices for pools of mortgages in various stages of default began to stabilize, typically around $.50-$.60 on the dollar.

As 2008 rolled along, the wheels of the financial markets truly lost their grip on the road, Washington stepped in with the Troubled Asset Relief Program (or TARP) in October. In the distressed mortgage market, uncertainty became the rule of the day, as buyers and sellers alike ceased trading in expectation of new clearing prices created by an asset purchase program that never came.

Traders then sat on the sidelines as the election played out, waiting to see how front-runner Barack Obama’s promised foreclosure moratorium would impact the housing market.

Meanwhile, Uncle Sam poured capital into banks to try and jumpstart lending. With taxpayers bailing out the market’s most leveraged players, Morgan Stanley (MS), Goldman Sachs (GS) and other Wall Street firms got a reprieve from bets gone awry.

Distressed investors hoped banks would finally be willing accept low prices for their assets. Not so. Just when it looked like a few select sellers were going to test the waters of the distressed market, the new Treasury Secretary Tim Geithner announced the Public-Private Investment Program (or PPIP).

The PPIP — a bastardized version of TARP that employs leverage, and is purported to profit both taxpayers and private investors — is yet to materialize.

The distressed whole loan market remains largely frozen, as sellers hope for higher prices from buyer’s backed by cheap government money. Buyers, meanwhile, remain cautious, since, despite recent “positive” datapoints coming out of the housing market, real-estate prices remain volatile in most markets.

The private market for delinquent mortgages once held the potential for a market-based solution to the country’s housing woes. It was no magic bullet, to be sure. But by fostering an environment where private capital could seek out advantageous investments, housing markets would have started down the path towards true price discovery.

As it happened, however, massive government intervention into the market via TARP, the foreclosure moratorium, the PPIP, and other programs forestalled the inevitable, pushing the date of the eventual recovery years into the future.

This is good news for banks that survived the maelstrom of financial market turmoil, albeit based largely on trumped-up earnings and unrealistic asset prices still on their balance sheets. For homeowners, consumers, and the public in general, however, true hope for a legitimate stabilization in housing markets, and the economy in general, has been pushed further along the curve.

By ANDREW JEFFERY

This post first appeared on Minyanville.

The horses, pigs, cows, goats, sheep, llamas, ostriches, dromedaries and rhinos have all left the barn, yet the US Securities and Exchange Commission (SEC) still thinks it should be minding the door.

In light of its woeful inability to perform even the simplest of tasks — like making sure the biggest hedge fund in the world, I don’t know, makes a trade once every 13 years — the Obama administration is looking to strip the SEC of certain regulatory responsibilities.

And rightly so.

According to Bloomberg, plans could be announced as early as next week outlining just how watered down the SEC’s role in the new Obama regulatory regime could be. It’s expected the Federal Reserve may take over the SEC’s oversight of firms deemed “too big to fail.” Keeping tabs on mutual-fund operations could become the domain of certain banking regulators.

The SEC, for its part, under the new leadership of 20-year veteran of the agency, Mary Schapiro, is fighting back. Shapiro says she’s frustrated the SEC isn’t more involved in high-level negotiations with financial firms like Citigroup (C), Bank of America (BAC) and Goldman Sachs (GS), and is making great strides in repairing the regulator’s tattered image.

Commendable, but too little too late.

The SEC is widely viewed as having committed the biggest regulatory bonk in modern financial history, turning a blind eye to Bernie Madoff’s $65 billion Ponzi scheme, and failing to, even in the remotest way, protect investors from the implosion of the market for mortgage-backed securities and other structured financial products stemming from rampant fraud, scant disclosure and blatant conflicts of interest.

Oh, and just days before Bear Stearns collapsed into the waiting arms of JPMorgan Chase (JPM), then SEC Chairman Chris Cox went on national television, assuring the country Bear was in good shape. Oops.

The SEC is a case study in regulation gone bad. It’s one thing to have openly unregulated markets, where participants understand there’s no one guarding the hen house. But when markets are purportedly policed by a powerful government body, investors assume some level of basic integrity and honesty.

By violating this trust, the SEC proved that weak regulation — and more specifically, weak regulators — do more harm than any amount of deregulation could ever do.

The looming restructuring of the financial regulatory complex will be a messy, political, imperfect process. But if the first step is dismantling the SEC’s web of incompetence, then we’re off on the right foot.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Many months ago, long before bureaucrats dreamed up their massive, ill-conceived loan-modification programs, the free market found a solution to the mortgage mess.

Specialists in handling distressed debt amassed tens of billions of dollars to buy up bad loans at steep discounts. The offending institutions who had bought the stuff in the first place would be forced to own up to their mistakes, take their lumps and move on. Meanwhile, those deft enough to clean up the problems would reap their just deserts.

Alas, it was not to be.

Sometime around the middle of 2006, some regulator woke from a decade-long slumber and decided to hazard a look at the balance sheets of America’s largest financial institutions. To his horror, just about every bank in the country would be insolvent, given the going prices for delinquent mortgage debt.

He raced off to tell his boss, who alerted his superior, and so on up the chain until then-Treasury Secretary Hank Paulson got wind of the coming tsunami of losses. Paulson barely flinched, for Wall Street’s top brass was well aware their collective predicament. After all, it was the likes of his former charge, Goldman Sachs (GS), who designed and sold the toxic assets in the first place.

The choice then was simple: Step back and let markets sort out the mess, risking the lives of storied firms like Citigroup (C), Bank of America (BAC) and JPMorgan Chase (JPM) – or latch onto the absurd notion that these institutions were “too big to fail,” and begin a process whereby the American taxpayer’s hard-earned nest egg would be used to forestall the inevitable day of reckoning.

We now know how that sad story ends.

To prevent the market from clearing these assets at their true value — sometimes just pennies on the dollar — lawmakers, bureaucrats and big bank executives huddled together and devised ingenious schemes like the Super-SIV, HOPE NOW, Project Lifeline, TARP, and other utterly contrived “solutions” that, despite their claims to the contrary, were simply ways to extend the lives of these zombie banks.

Two pieces today, one run by Bloomberg charting the failure of myriad modification programs to address the problem of negative equity, and one in the New York Times documenting the exploits of former Countrywide executives buying distressed debt from the FDIC on the cheap, evidence the abject failure of government efforts to stem the rising tide of foreclosures.

Private investors, the ones best suited to forgiving principal or lowering interest rates to keep a family in their home, were handcuffed by political bumblings. But these programs, by preventing true price discovery in the housing market, have likely achieved their goals of their designers.

Our banking system has buckled, but not broken. The eventually recovery, however, has been pushed well down the line and the cost shoved onto future generations. Those responsible have by in large retained their posts at the institutions deemed “too big to fail,” save a couple token scapegoats tossed to the media wolves.

Meanwhile, the responsible few who did not speculate on their home, did not use credit as a vehicle for illegitimate economic growth and never thought they’d be asked to pick up the tab for those that did, have now been asked to shoulder the burden.

It should come as no surprise that housing prices keep falling — indeed they must in order for true stabilization to occur. But the slow bleed, the persistent drag on the fundamentals of our economy, is doing more damage under the hood than our wise leaders would care to admit.

Still, they insist the more economic control centralized in Washington, the better. After all, the ones that drove us off this cliff certainly should know how to break the fall.

By ANDREW JEFFERY

This post first appeared on Minyanville.

From expansive estates in the Hamptons to mansions on the Malibu cliffs, the rich are watching their vast real-estate wealth evaporate before their eyes.

Perhaps no market epitomizes the ultimate surrender of high-end real estate than the island of Manhattan, where housing prices had held relatively stable until quite recently, despite broad declines across the country.

Turmoil on Wall Street, the collapse of Lehman Brothers, and layoffs at big employers like Citigroup (C), JPMorgan (JPM), Morgan Stanley (MS) and Goldman Sachs (GS) have finally taken their toll on the once-proud market for overpriced, undersized refuges from the concrete jungle.

The Wall Street Journal reports housing inventory in Manhattan jumped 39% in the fourth quarter as sales plunged – even as prices managed to eke out a 3.1% gain from a year ago.
Meanwhile, condominiums and cooperative apartments currently under contract to be purchased are selling at a whopping 20% below the prices paid just last summer. As sales data reflecting those transactions emerge in the coming months, Manhattanites may finally wake up to the reality that their housing market is no longer immune from the afflictions the rest of the country knows all too well.

Compounding the effects of an abysmal bonus season throughout the financial industry, ongoing job cuts, and generally weak economic conditions, lenders continue to scale back the availability of so-called jumbo mortgages. These loans, too big to fit within the ever-narrowing lending guidelines of Fannie Mae (FNM) and Freddie Mac (FRE), don’t qualify for a government guarantee.

Banks take on more risk by originating these loans, and charge higher rates for the pleasure. Bankrate.com (RATE) reports jumbo rates remain more than 1.5% higher than their smaller, conventional counterparts.

Since most Manhattan condos and co-ops are purchased with jumbo loans, these persistently high rates mean prices on the island are being only marginally supported by recent, aggressive moves by the Federal Reserve and Treasury Department to spur home buying.

Wells Fargo (WFC), now the nation’s largest mortgage lender after completing its acquisition of Wachovia, isn’t helping matters for high-end buyers. The California-based bank announced yesterday it would stop offering jumbo loans through its wholesale (or broker-originated) channel. MortgageDaily.com reports Wells cited low market demand and higher risks in its decision to suspend jumbo offerings for mortgage brokers.

The ongoing financial crisis, which arguably originated in the narrow winding streets of Wall Street, has now come full circle. The same bankers, traders and financiers who levered houses up beyond all rationality are now seeing the dark side of structured finance gone awry.

Some will wisely sell now, while they still can, take their lumps and move on. Others, stubbornly clinging to their former glory, are likely to go down with the ship.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Constrained supply, continuous demand and wealth beyond imagining: There’s a reason New York City real estate is the most expensive in the country.

Easy lending, a weak dollar and gobs of Wall Street money pushed already sky-high Manhattan property values into the stratosphere during the housing boom. Now, finally, after the rest of the country has succumbed to the housing crisis, the city that never sleeps could be facing a real-estate crash of its own.

According to Bloomberg, commercial real-estate transactions plummeted more than 60% this year; lending has dried up and buyers have backed off. Despite all the fundamental reasons for New York real estate to remain strong, it’s Pollyanna-ish to believe it will remain an island of calm in an economy deteriorating by the day – especially when the epicenter of the economic calamity can be found at the southern tip of the island.

Tuesday, Toll Brothers (TOL) CEO Robert Toll issued a dour outlook for Manhattan property prices: “Up [till now], New York City was a nice stand-alone, and a beacon, but it has now joined the ranks of the rest of the country… I would expect the financial business in New York to probably lose 100,000 people.”

Toll went on to explain that “The foreign market, which supported in large measure the pricier condos in New York City, is not there in force as it was… what with the euro going down in comparison to the dollar lately, and with their own economic crisis.”

And when New York City real estate goes, it goes big.

The last housing slump in Manhattan began in at the end of 1987 and lasted for nearly 10 years. During that time, according to data compiled by quadlet.com, prices fell 40%. Adjusted for inflation, they tumbled almost 60%.

The New York Metro area is poised for a similar fall. According to the S&P Case/Shiller Home Price Index, home prices have slipped just 6.9% in the last year, compared with 26.7% in the Los Angeles area, 27.3% in San Francisco, and 9.8% in Chicago.

As the housing slump spreads into previously strong markets, these pockets of strength are starting to crack.

The longer credit markets remain under duress — and when firms like Goldman Sachs (GS), Morgan Stanley (MS) and Citigroup (C) are laying off ever more employees in their ongoing cost-cutting efforts – the deeper the slump is likely to be. A strengthening dollar and floundering economies around the world will continue to keep foreign buyers away.

What goes up, must come down.

This post first appeared on Minyanville.

As the debate rages about whether or not we’re finally approaching a floor in home prices, let’s examine the value of another asset: The mortgage.

When considering a home-buying transaction, buyers (and sellers) typically worry most about the value of the house. Lenders, on the other hand, are much more concerned with the value of the mortgage.

From a lender’s perspective, the economic value of a loan is its expected future cash flow in the form of interest payments. The key word in that phrase – and why a loan’s value isn’t purely derived from its rate – is “expected.”

To a bank, a loan is just a product, like an iPod is to Apple or a BlackBerry is to Research in Motion. The value of that product is just how much someone will pay for it. Loans with higher coupons, adjusting for risk, are worth more than those with lower coupons, because they fetch more on the open market.

Mortgages, or debt of any kind, are priced relative to their face value, or “par.” A $100,000 mortgage that’s worth par would cost $100,000. Prices are then expressed as a percentage of par. That is, a loan with a face value of $100,000 that’s worth 102.50 (percent) would cost $102,500.

Subprime loans are often considered “bad,” while prime loans are presumed to be “good.” Many assume, therefore, that high-quality prime loans are worth more than those lousy subprime ones. This isn’t entirely accurate.

“Good” loans are the ones where you’re appropriately paid for your risk, whereas “bad” ones are those in which you’re on taking too much risk relative to return. As Professor Sedacca often says, “If you aren’t being paid to take risk, don’t take risk.”

Consider the following 2 mortgage situations, ask yourself which one a lender is likely to value more highly:

Borrower A has impeccable credit, can make a sizable 30% down payment on her family’s first home, but will have to stretch to make the monthly payments because her husband just quit his job to stay home with their second child. The mortgage carries a low 6.00% rate, or coupon, because of Borrower A’s good credit and the low loan-to-value ratio (loan amount divided by sales price).

Borrower B has poor credit, stemming from medical problems that put him out of work for the past 12 months. Credit-card bills piled up, payments were missed and he had a hard time making ends meet. Healthy now, Borrower B is looking to refinance his existing mortgage on the home he’s lived in for 20 years. He needs some extra cash to finish paying off bills and get back on track, so he’s looking for a loan to value of 90%. The mortgage carries a high 9% coupon because of Borrower B’s bad credit and the loan’s high loan-to-value ratio.

I designed the examples to prove a point, but I would take Borrower B’s “subprime” mortgage over Borrower A’s every time. Even though Borrower A’s perceived risk (by the numbers) is less than Borrower B, Borrower A is probably more likely to default. Despite Borrower’s A big down payment, the low coupon may not cover the additional default risk.

Banks often write mortgages with the intent to sell them on the open market. Whether the loan is sold individually or packaged in a security, the higher the coupon, the higher the potential value for the ultimate owner (provided, of course, the risks are properly measured and evaluated).

Mortgage originators (both banks and brokers) and Wall Street firms used this concept to push bad loans onto borrowers. Whether Goldman Sachs (GS) wanted to issue a mortgage-backed security or Wells Fargo (WFC) planned to park the loan on its balance sheet, both earned more from higher coupon loans, so that’s what they asked for from their salespeople and brokers.

One of the most highly sought-after types of mortgages were those with a high loan-to-value ratio, written for speculative investment properties where borrowers didn’t have to state their income. These loans carried a very high coupon because of the high perceived risk of default.

However, since homeowners in areas experiencing rapid appreciation like Phoenix, Las Vegas, Florida and California could easily sell their way out of a problem during the boom, the actual risk on these loans remained low. Wall Street demanded precisely this kind of loan, and brokers wrote them. Whether the borrower could really afford the payments didn’t matter, since they could just sell the house at the first sign of trouble.

Of course, when appreciation stalled, actual risk shot up, and even high rates didn’t compensate banks for the risk these loans now carried.

Since Wall Street could earn far more packaging and securitizing these high-risk loans than they could on boring, low-coupon prime loans, they paid mortgage brokers and bankers higher commissions to write them. These originators, being good salespeople, aggressively marketed these loans to borrowers that fit these highly profitable criteria.

Homeowners, watching their neighbors get rich speculating on condos in Miami, had little to no financial incentive not to join in. That’s not to say there weren’t some who made responsible decisions - but enough people got caught up in the mania that, well, we are where we are right now.

So this brings us back to your mortgage. How much is it worth?

Remember to think about it from the bank’s perspective.

The next time you hear offers like “no closing costs!” or “low introductory rate!”, think about why the bank would do this. If it’s not charging fees to close the loan, you can be sure it’s making up that lost income with a higher rate. If it’s offering a teaser rate, the higher payments you’ll be making when the coupon adjusts upwards will more than make up for that low payment in the first few months.

The best way to get the best deal is to think about what loan will be worth the least to your lender. Low rate, low fees, low risk… Who wants that boring paper?

The answer: You do.

This post first appeared on Minyanville.

Yesterday, I criticized Washington’s $700 billion financial bailout plan for missing the point. It fails to address the root of the problems facing the housing market and, by extension, the rest of the economy: Negative equity or a homeowner owing more on his house than it’s worth.

On The Exchange, several sharp-minded Minyans pressed for details on how the government could execute a program to “absorb negative equity” in a fair, equitable, efficient manner – and without bankrupting the entire country.

To be clear, I’m fundamentally opposed to government intervention into the free market beyond a requisite regulatory capacity. I’m also deeply skeptical that government can manage any program, large or small, with even the slightest degree of aptitude.

Unfortunately, the usefulness of ideological debate is growing fainter by the day. Practical solutions must be put forth and implemented immediately, lest we slip further toward a second Great Depression. Historians are welcome to argue semantics while we get down to fixing the problem. Only a mixture of public and private enterprise can repair the damage.

Negative equity creates a number of serious problems for the housing market, such as:

Foreclosures

Negative equity turns defaults into foreclosures. Delinquent borrowers can sell their way out of the problem if they can find a buyer at a level higher than their outstanding mortgage (plus closing costs and real estate agent commissions). But being underwater makes this impossible without coming up with the difference between the loan amount and the sale price.This is cash most struggling homeowners simply don’t have.

Oversupply

Negative equity exacerbates existing oversupply issues, pushing home prices down further. Sellers who haven’t yet missed a payment must list their house at least as high as their outstanding mortgage. But if a homeowner is upsidedown, the property gets listed too high and stays there. Borrowers must then choose to continue pouring money into a losing bet, while hoping someone buys their house at well above its market value. The alternative is to default and end up in foreclosure.

Bank losses

Once a mortgage becomes delinquent, banks must write down the asset and take a loss. Not only is the loan impaired because of the delinquency, but negative equity enhances the bank’s losses. As property values fall, balance sheets become even more impaired, mortgage-backed securities continue to lose value and the entire financial system becomes even more desperate for capital.

Banks are bleeding cash: JP Morgan (JPM), Wells Fargo (WFC), Citigroup (C) and Bank of America (BAC) all recently announced reduced earnings and were forced to take equity injections from the Treasury. Lenders are reticent to accept short sales (allowing borrowers to accept a sale price lower than the loan amount without making up the difference) because they can’t handle the losses.

Now, for the solution(s).

There’s no magic bullet, no one solution that can, in one fell swoop, wipe the slate clean. As I’ve described it, “sopping up negative equity” is an immensely complicated task. The mortgage industry is massive, inefficient, disjointed, riddled with redundancy, buried in paperwork and plagued by bad regulation and misplaced incentives. In short, it’s a mess. Cleaning it up will take a very, very long time.

Still, I’d argue spending money on the programs below — without any hope of it being returned — is a better use of taxpayer funds than watching hundreds of billions of dollars simply disappear into the opaque balance sheets of what remains of the financial system.

There may be additional solutions, but this laser focus on earning taxpayers a return on their investment dilutes the effectiveness of many important initiatives.

Principal Forgiveness

Fannie Mae (FNM) and Freddie Mac (FRE) are already experimenting with a pilot program to give borrowers the amount of their negative equity as an unsecured loan. Based on the most recent appraisal (appraisals are, for all their faults, currently the most accurate way to value individual homes), Fannie and Freddie could pay down the negative equity — plus some cushion for future depreciation — and refinance the existing loan at, say, an 80% loan to value.

Even if the government-sponsored enterprises started with just their own portfolio, that would be a huge step in the right direction. For loans owned by banks and in securities, Fannie and Freddie could pay off the mortgage at the outstanding balance, forgive the necessary principal and write a new loan.

At this point, the homeowner is free to sell the house at the new, lower market price (price discovery) or go on making the now much-more-manageable mortgage payments.

Shared Equity

Banks could “sell” negative equity to Treasury, sharing any future upside based on each party’s pro rata share of the home’s current value (again, we’re forced to use appraisals because there just is not a better option – yet). When the home sells, the bank and Treasury would participate in any future appreciation. If the home’s value continues to slide, the bank is less exposed to the losses.

Bank’s could effectively choose the amount they write off: The more they receive from Treasury, the less upside exposure they retain. On the flip side, stronger banks would be able to write off just enough to stay afloat without losing future earnings potential.

The U.K. is already trying a version of this program.

Homeowners, out from underneath the negative equity and armed with lower mortgage payments could stay in their homes or sell at the current market price. Again, forced price discovery while keeping people in their homes.

Community Redevelopment

I believe the best way out of this mess is to set up a federal land bank system, where funds are distributed by the Treasury to local community development organizations and vetted real estate developers. I recognize the potential for bureaucratic abuses, but unfortunately the government is the only organization with the scope to handle the problem on a national scale.

Just as we now have a Bailout Czar, we need a Housing Bailout Czar to oversee such a program. I’m sure Goldman Sachs (GS) could send up another of its finest for the betterment of the country.

Groups like Habitat For Humanity, which have existing ties in the community and teams of professional and volunteer contractors, could dramatically help rebuild struggling communities with requisite resources from the federal government. These groups could either buy foreclosed properties, refurbish them and rent them out, write low cost mortgages through the land bank or offer up funds to enable banks to accept short sales.

If there’s a better use for taxpayer money than rebuilding communities after a tragedy, helping families put their lives back together – I’m not sure what it is.

Will some speculators be helped in the process? Probably. But the good news is the widespread economic implications of this crisis, which are now inevitable, will take care of much of the moral hazard we so fervently argue against.

Not every stock speculator was taught his lesson after the stock market crash of 1929, but the Great Depression did affect an entire generation, encouraging thrift and aversion to risk for decades. Now isn’t the time to take the moral high ground, only to watch our cities washed away by the rising flood of poverty.

This isn’t socialism, it’s being American.

This post first appeared on Minyanville and our sister site, Dawn Patrol.

Every once in a while, the most important news story of the day is the one the Wall Street Journal allots a mere 200 words.

In a move that will soon be greeted with quiet mutterings of “I should have seen this coming,” British Prime Minister Gordon Blair announced today a shift in the focus of initiatives aimed at reviving the ailing housing industry, and by extension the rest of the economy.

Until this point, much of the government-directed efforts to fix broken housing markets — both here and abroad — have focused on the mortgage side of housing transactions.

This should come as no surprise, as Wall Street banks like Goldman Sachs (GS), Merrill Lynch (MER), Lehman Brothers (LEH) and Bear Stearns — er, JPMorgan (JPM) — had staked their reputations — and balance sheets — on those mortgages.

Foreclosure prevention has attempted to preserve the integrity of the loan by extending its ability to keep generating cash for the lender. If a family or 2 were helped in the process, all the better. But with trillions of dollars in securities propping up the world’s financial system based on unreliable monthly payments from struggling American consumers, the mortgage was saved in favor of the property itself or its inhabitants.

HOPE NOW and Project Lifeline have been our bureaucrats’ best effort at leeping people from being kicked out of their homes. Anecdotally and by the numbers, the results have been less than awe-inspiring.

As part of a larger economic reform package, Brown is taking a decidedly different approach. Any homeowner behind on his mortgage and facing the risk of repossession will have his situation evaluated by a “money advisor,” who, according to the Guardian, will determine whether nor not the loan is worth salvaging.

If this guru of the economically unfeasible gives the thumbs-down, the borrower gets a rescue package; the government gets the house. A housing association or other publicly funded group can then lease the property back to for the former homeowner or otherwise rehab the property for new tenants.

The lender can either be made whole or can retain some of the risk (and therefore potential return) in the property, staying in the game a bit longer.

This focus on the raw asset — the house — rather than on a flimsy deed of trust represents a step in the right direction in the “war on foreclosures.” The mere fact that Washington (and London) are dipping their tentacles this deep into housing markets should rightly disturb anyone with even half-hearted capitalistic ideals – but some government plans are better than others.

The problem with mortgage-focused foreclosure prevention is that it prolongs a borrower’s agony by keeping him in a loan he or she should never have taken out in the first place. The house itself bears the brunt of this strategy’s shortcomings, since homeowners forgo maintenance, landscaping, trash removal and other value-preserving services to survive another month.

By stepping in and taking control of the property before the copper pipes can be ripped out and the repossession process can further erode the home’s resale value, the plan could slow some of the economic hardship and community decay caused by abandoned, vandalized homes.

Although the business of buying and selling distressed mortgage assets — including bank-owned homes — is hacking its way through the world of troubled properties, the scale of the problem and the challenging nature of the transaction itself mean that the crisis will take years to work through.

If the government is going to use taxpayer dollars to try to get us out of this mess, land banks and direct funds for rebuilding communities isn’t a terrible place to start.

It sure beats bailing out Wall Street.

This post first appeared on Minyanville, and our sister site, Dawn Patrol.

Another month, another attempt to use a single data point to foretell the bottom in the housing market.

On the same day the Case Shiller Home Price Index reported the fastest drop in home prices on record (again), the Wall Street Journal released analysis indicating beaten down markets are beginning to work through inventory overhangs.

Shrinking supply in the most troubled markets is likely a blip, however, as volatile trading in distressed assets is driving the real estate market in these areas.

According to the Journal, metro areas like Sacramento, California, Denver, San Diego and Las Vegas actually reported a decline in housing inventory from a year earlier. Supply is still well above historical averages but, the report argues, if this trend continues it could usher in the end to the real estate slump.

But in cities like Portland, Oregon, Seattle, Charlotte, North Carolina and New York, where home price declines are just beginning, the backlog of unsold homes is piling up. Supply in New York and Portland is up 31% and 28% respectively. Stagnant prices and swelling inventory are signs of a market that’s about to crack.

Even in markets poised for a correction, real estate brokers desperate for sales commissions are frantically pounding the table, calling this the buying opportunity of a lifetime.

Meanwhile, back in a world still loosely based on reality, easing inventory is a result of changing market dynamics, not an imminent bottom.

First, in troubled areas like California’s Central Valley and Inland Empire, (east of Los Angeles) Phoenix and Las Vegas, foreclosure and other distressed sales account for almost half the total transactions. As vulture funds and other investors swoop in to purchase delinquent mortgages and abandoned houses, such opportunistic buying has reduced inventory.

Small boutique investment firms, big hedge funds and Investment banks like Lehman Brothers (LEH), Goldman Sachs (GS) and Merrill Lynch (MER) are driving these markets. Some are buying foreclosed homes en masse, while others are snapping up delinquent mortgage at a deep discount. As the new owner of the loan tries to sort things out with the borrower, homes previously for sale come off the market.

The majority of these properties, however, will just end up for sale again: Almost half the delinquent mortgages traded in this market ultimately end up in foreclosure. Investment banks and hedge funds aren’t in the business of owning portfolios of residential real estate, so in a few months they’ll start punting homes at further discounted prices.

Second, year-over-year comparisons for real estate and mortgage data are about to get a lot easier. Think back to the beginning of the credit crunch last summer – the mortgage market all but shut down. Real estate transactions ground to a halt, inventory spiked and price declines began to accelerate.

For as bad as the real estate market is today — and while prices have certainly come down — activity last year around this time was even worse.

In the next few months, new calls for a bottom will ring out. But given that so-called experts have been calling for a bottom since, well, the top, Minyans would be wise to continue to wait patiently for real signs this has occurred.