This post first appeared on Minyanville.

Despite the best efforts of the Federal Reserve and the Treasury Department, the free market is winning the battle over mortgage rates. Tens of trillions of dollars in support for the financial system can’t change the stark reality: Giving out home loans remains risky business.

Borrowers looking to take advantage of rock-bottom interest rates are seeing the opportunity slip through their fingers, as rates have risen by more than 0.50% in the past few weeks.

According to the Wall Street Journal, the pop in rates is due to expectations of economic recovery, combined with fears that the mounting pile of debt incurred by Washington’s central economic planners may not be sustainable. As the government prints money and plunges the country into an ever-deeper deficit, holders of US Treasuries (e.g. China) are getting skittish. These investors are quietly demanding a higher return on their bet that our economy will pull out of its current tailspin.

This, in turn, is pushing up mortgage rates, which doesn’t bode well for nascent signs of recovery. Big lenders like Wells Fargo (WFC), Bank of America (BAC) and JPMorgan Chase (JPM) — despite offloading nearly all default risk to taxpayers via Fannie Mae (FNM), Freddie Mac (FRE), or the Federal Housing Administration — are asking prospective borrowers to pony up hefty points up front to get the lowest rate possible.

And this at a time when pundits and performance-chasing portfolio managers are latching onto the absurd notion that the nation’s housing market is making some sort of fundamentally sound turnaround. A contributor to CNBC actually said with a straight face that our economy can’t grow with mortgage rates this “high,” and that the Fed is derailing the recovery by letting rates move up.

To say that our economy is undergoing some sort of legitimate recovery, and at the same time assert mortgage rates a hair above 5% are too high is to confirm that those declaring the recession in our rear view mirror are delusional at best, talking their book at worst.

As renewed fears of inflation percolate and investors begin to snatch up commodities in expectation of future prices, pressure will mount on the Fed to keep rates of all kinds low to ensure the economy doesn’t remain mired in its current malaise. This means more printing press activity, more “quantitative” easing, and more social-welfare programs packaged as “progressive” economic policy.

Battle lines are being drawn: Washington bureaucrats on one side, advancing the theory that money can be printed seemingly without limit to generate legitimate economic growth - and the market on the other. And each time the Fed takes its foot off the dollar-debasement accelerator, we get a peek into what will happen when the printing presses finally run out of ink.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Despite Herculean efforts, the Federal Reserve is losing its battle to keep mortgage rates at all-time lows.

As fear that we’re headed for imminent collapse slowly wanes, investors’ appetite for risk is coming back. This renewed confidence has helped buoy stocks, and the major equity indices have rallied more than 30% from their March lows. The shift, however, has come at the expense of the Treasury market, which has been in a 7-week slump.

According to Bloomberg, big money managers like Blackrock (BLK) are betting the Fed will step in to support the Treasury market (again), as regulators hope renewed Treasury purchases will push down mortgage rates (again).

Bond prices and yields move in opposite directions. When investor demand falls, so do prices, pushing up yields. And as investors shun the safety — but relatively low return — of government-backed debt, the impacts are felt throughout the credit markets. Of concern to the Fed, and what has led Chairman Ben Bernanke to increase Treasury purchases in the past, is the effect this dynamic has on mortgage rates.

A mortgage is nothing more than a long term bond, given to a borrower to purchase a home. So when lenders get fearful they’re not being compensated for tying up money for as long as 30 years, they increase rates. Further, as the specter of inflation rises, lenders demand bigger interest payments to keep up with higher prices. In other words, when dollars in the future are worth less than dollars today, banks demand higher payments to make up the difference.

Keeping mortgage rates low has been a cornerstone of Washington’s efforts to jump start the flagging housing market. But with rates at the highest level since April, the “smart money” is betting the Fed may return to the Treasury market en masse.

Paradoxically, even as the Fed tries to keep interest rates low — which are rising in part due to the expectation that higher prices loom in the years ahead — its actions increase the likelihood of future inflation. Running its printing presses around the clock has consequences, even if Fed officials are loathe to admit it.

Minyanville’s Mr. Practical often discusses the fallacy that credit markets are improving. As he points out, only in corners of the market where the government has stepped in to support lending is any so-called “normalcy” returning.

So too in the mortgage market.

Loans backed by Fannie Mae (FNM), Freddie Mac (FRE) and the Federal Housing Administration account for the lion share of mortgages currently being issued in this country. Aside from the occasional jumbo loan written by banks like JPMorgan (JPM) or Wells Fargo (WFC), government mortgages are the only game in town. Coupled with the Troubled Asset Lending Facility (or TALF), which funnels money into the market for mortgage-backed securities, the home-loan market remains completely dependent on government support.

This is one reason recent “strength” in the housing market will provide transitory. There’s a limit on how much government can control markets, as evidenced by mortgage rates that move persistently higher every time the Fed eases its aggressive intervention. Fundamentals, not subsidies, will provide a true floor in prices.

And as banks prepare to unleash a firestorm of foreclosure inventory into the market, fundamentals will remain pointed south, thereby pushing down prices. And as foreclosures continue to infect higher end real-estate markets, these price declines will be felt by a growing — and more prosperous — segment of the population.

Mortgage rates, left to their own devices, would be far, far higher without government support. This is the message of the market - one bureaucrats in Washington seem unwilling to learn.

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.

“If at first you don’t succeed, try, try again” - and you certainly can’t fault lawmakers for a lack of persistence in trying to stem the epidemic foreclosures plaguing America’s housing market.

Sadly, they insist on trying the same failed strategies over and over again.

For more than 18 months now, Congress has resolutely believed loan modifications are the path out of the housing jungle. But despite a blitzkrieg of public-relations campaigns and benevolent-sounding foreclosure-prevention programs like “Hope for Homeowners,” “HOPE NOW” and the latest, the Federal Reserve’s “Homeownership Preservation Policy,” modification efforts continue to sputter.

Even private-sector programs announced by big banks like Citigroup (C) and Bank of America (BAC) have had only marginal success.

After months of relentless pressure from the House and Senate alike, the Fed’s new policy allows it to review loans supporting the assets it purchased after it rescued Bear Stearns and AIG (AIG) for potential modifications. Barney Frank, the House Financial Services Committee Chairman, told reporters yesterday, “This is a very big deal.”

Actually, Mr. Frank, it’s not.

The assets acquired when the Fed and Treasury Department backed the JPMorgan (JPM) buyout of Bear Stearns and nationalized AIG were derivatives, not actual loans. These mortgage-backed securities are supported by thousands of individual mortgages, while the interest in those underlying loans was sliced up and allocated to countless securities, derivatives, and derivatives of derivatives.

Securities owners can’t modify mortgages: The rules about altering loan terms are pre-determined in securitization documents. It’s left up to loan servicers to implement the rules, whether the security owners like it or not.

Nevertheless, according to Bloomberg, the Fed — after identifying which loans it holds a fractional interest in — will encourage the servicers of those residential mortgage-backed securities “to implement a loan modification program that is consistent with this policy.”

Congress, Treasury and now the Fed have been trying to months now to get servicers on board with modification efforts, to no avail. Even the FDIC, whose highly touted modification program is being tried out at defunct California thrift IndyMac, has been unable to successfully – and sustainably — modify loans en masse.

The reason modification efforts aren’t working — amid evidence that Washington continues to ignore the root of the housing problem — is that the vast majority of loan defaults are being caused by job losses and negative equity. Borrowers can’t get a new loan without a job, nor can they qualify for a modification if they owe more on their house than it’s worth.

According to data released by JPMorgan yesterday, average equity for subprime loans stands at less than 5%.


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It’s negative for all Alt-A adjustable rate mortgages.



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Average equity in jumbo prime loans, which are experiencing defaults at faster rates than either subprime or Alt-A, has tumbled from 45% in January 2006 to less than 20% at the end of last year.


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And, even as regulators force mortgage rates down to record lows to encourage buyers to step in — catching the falling knife of tumbling home prices and risking financial ruin for the benefit of the rest of us — property values continue to fall.

Meanwhile, regulators and lawmakers continue to parade bold foreclosure-prevention efforts before the public. And they’ll keep trying - even if it bankrupts the country.

By ANDREW JEFFERY

This post first appeared on Minyanville.

$100 billion just isn’t what it used to be.

Over the weekend, Freddie Mac (FRE) requested a second draw on its Treasury Department credit facility, saying $30-35 billion would suffice to keep its net worth above zero, thank you very much. After taking $14 billion in the third quarter of last year, Freddie has now chewed through almost half its $100 billion taxpayer-provided safety net in just 5 months.

According to Bloomberg, Freddie’s fourth -quarter operating losses triggered the need for additional funds, as its massive mortgage portfolio continues to sour. Analysts expect Freddie’s sister company, Fannie Mae (FNM), to request a similar draw when it announces fourth-quarter results in February.

As one analyst told Bloomberg, “[Fannie and Freddie’s] losses are going to be much higher than anyone anticipated. The more and more that people are digging into these portfolios, they’re finding out the more and more these guys were doing subprime and Alt-A loans and classifying them as prime.”

Defaults on prime mortgages, which are supposed to be given out to borrowers with good credit and stable jobs, are now increasing at a faster rate than the subprime loans that get so much headline play. According to the latest Mortgage Bankers Association Delinquency Survey, 2.87% of all prime loans were delinquent in the third quarter of last year, up 85% from the same period a year ago.

Keep in mind those figures are through September 2008 and don’t include the abysmal economic conditions of the past 4 months. And as layoffs mount and the economy continues to contract, the previously well-to-do are facing the same economic hardships those “subprime” people have been dealing with for almost 2 years.

Fannie and Freddie, despite not technically being involved in subprime lending, drove industry trends, and, in many ways, set precedents followed by the rest of the mortgage industry. Their drive to automate the loan underwriting process created massive opportunities for fraud. Both savvy and ignorant originators easily duped the system, jamming subprime borrowers into prime loans, which neatly showed up on bank balance sheets as AAA-rated assets.

The sieve-like automated systems were adopted by other big lenders, such as Countrywide, Washington Mutual, Bear Stearns, Lehman Brothers, IndyMac and Wachovia.

Now that none of those firms exist, loans originated under the guise of “prime” are turning out to be anything but. Bank of America (BAC), JPMorgan (JPM) and Wells Fargo (WFC), heretofore the strongest banks in the country, who absorbed many of those defunct lenders, are now faced with mounting losses on loans they thought were of the highest quality.

As I noted about this time last year, while everyone was so focused on subprime, prime mortgages — a market about 4 times as large — quietly presented a far bigger threat to the financial system. Now, as the government has bailed out 2 of the 4 remaining big American banks, those loans threaten the federal balance sheet.

Where’s TARP 2 when you need it?

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.

It’s wishful thinking that artificially low interest rates alone are enough to rehabilitate the housing market.

The mortgage industry has undergone a swift and ruthless downsizing over the past 18 months. While a necessary part of the corrective process, the market is ill-equipped to handle the onslaught of new loans that regulators are hoping to incite.

Last week, the Wall Street Journal reported the Treasury Department is considering pushing down mortgage rates to levels not seen since the heyday of the housing bubble. Through the recently nationalized mortgage giants, Fannie Mae (FNM) and Freddie Mac (FRE), loans would be offered to qualified homebuyers with rates as low as 4.5%.

The story sparked a wave of refinancing as rates on all types of mortgages tumbled. Coupled with the Federal Reserve’s plans to buy agency debt and freshly originated mortgage-backed securities, the stage is set for renewed buying activity.

Although Treasury Secretary Hank Paulson has since denied that he’s planning such a move, he did say that he’s “always looking at new ideas” and that “the key thing to get us through this period is getting housing prices down.”

Whether there’s an official program of 4.5% mortgages is immaterial, as Washington is doing everything in its power to push rates as low as possible.

It’s hard to argue cheaper mortgages won’t encourage buyers to leave the sidelines and jump into the market. However, as Bloomberg noted this morning, layoffs at mortgage companies and banks like Citigroup (C), JPMorgan (JPM) and Bank of America (BAC) have greatly diminshed origination capacity. Lenders, having already tightened underwriting standards, have limited resources to process new applications.

Many are hoping low rates will encourage refinancing and help clear out the toxic subprime and Alt-A securities still plaguing the financial system. Unfortunately, the loans originated for securities in 2005, 2006 and 2007 – the ones causing all the trouble — were done with minimal down-payment requirements. Falling home prices mean most of these borrowers are underwater - and thus unable to refinance.

Furthermore, any renewed buying is likely to be met with a flood of new supply. There’s a concept in real estate known as “phantom inventory,” which refers to homeowners who want to sell, but keep their homes off the market while they hope for conditions to improve. Some experts believe actual inventory levels, when these would-be sellers are taken into account, is as much as 25% higher than official data show.

Anecdotally, this makes sense. For each buyer waiting for lower prices to step in, there’s a seller waiting for a better market. So any pop in buying activity will offer sellers an opportunity to list their homes in a seemingly stronger market. As foreclosures continue to spread into previously unaffected areas, inventory levels are likely to remain high throughout much of the country.

And while attractively-priced, well-maintained homes in desirable neighborhoods will continue to sell, more of the same will be available in each successive month. Patience remains the best ally for the prospective buyer.

By RYAN TAYLOR

It’s still a lousy time to be selling new homes.

The National Association of Home Builders, or NAHB, shared its sentiment index for December, which remained at a record low of 9. The index is based on 426 residential developers nationwide; a reading below 50 reflects negative sentiment. In addition to the general index number, confidence levels for current sales dropped to 8 from a reading of 9 last month. The six-month sales forecast dropped from 18 to 16. To say confidence remains extremely low is a bit of an understatement.

The NAHB sentiment index number is an important gauge of the health of the overall market. In many of the hardest hit areas of the country, there remains a glut of housing supply - particularly new construction. Homebuilders are aggressively cutting prices, which is adding to existing downward pressure on prices caused by foreclosures. Since new homes are often more desirable than existing homes, watch any strength in homebuilder sentiment as a prelude to possible strength in the broader market.

While many prognosticators are starting to believe we’re moving into a bottoming phase in the housing market, the chief economist of the NAHB, David Crowe, remains unconvinced:

“We have seen no improvement over the past month in terms of sales conditions for new homes. In fact, certain factors have gotten progressively worse, not the least of which is the job market, where massive layoffs are having a devastating effect on consumer confidence.”

The sobering reality of the housing market is that its recovery has been postponed due to the global recession and the resulting job losses. Despite aggressive moves by the Treasury Department and Federal Reserve to lower interest rates and spur demand, people without jobs simply do not buy houses.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Treasury Secretary Hank Paulson is hoping he’s found the magic bullet to solve the US housing market’s seemingly never-endless woes.

He hasn’t.

By throwing around the weight of recently nationalized mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), the Treasury Department is considering a plan to push interest rates on purchase money mortgages down to 4.5% - well below the current market rate of around 5.75%.

Artificially lowering rates so buyers can afford more house led us into this mess; it’s doubtful the same tactics will lead us out.

According to the Wall Street Journal, the plan is in the early stages of development, but officials expect the initiative to spur buying activity. The aim is to prop up home prices by enabling borrowers to afford more expensive houses. Columbia University economists believe such a program could help between 1.5 million and 2.5 million Americans buy new homes.

In order to qualify for the low rate, borrowers have to meet Fannie and Freddie’s now-stricter loan underwriting requirements. But even with more affordable monthly payments – the lower rate amounts to savings of $150 per month on a $200,000 loan — precious few prospective buyers are willing and able to pony up the tens of thousands dollars still required for a down payment.

Combined with the Federal Reserve’s recent $200 billion lending program for securities backed by newly originated mortgages, bureaucrats are pulling out all the stops to buoy falling property values.

This is the latest in a series of botched attempts to re-inflate the housing bubble. And like the others before it, the plan fails to address the root causes of ongoing home price declines: Negative equity, over-supply and mounting job losses.

The flood of recent loan modification programs championed by FDIC Chairman Sheila Bair and rolled out by JPMorgan (JPM), Citigroup (C) and Bank of America (BAC) also miss the point. Like any distressed market, the housing market badly needs price discovery. And like any other asset class, the true price of a house is only discovered when someone buys it on the open market.

By creating unnaturally low interest rates and allowing buyers to purchase bigger homes than they could normally afford, Paulson and Bernanke are preventing home prices from falling back to where responsible, fiscally minded Americans can buy without the crutch of government subsidies.

These continued distortions of the free market end up running in contrast to their intended goals: As long as the charade continues, as long as the real estate market is prevented from finding a natural bottom, home prices will continue to fall.

The silver lining — for those brave enough to uncover their eyes and look – is that just as it overshot on the way up, the housing market will likewise overshoot on the way down.

A protracted period of stabilization will ensue, during which time the opportunity to purchase high-quality residential real estate below its long-term intrinsic value will be extraordinary.
Savvy investors with the ability to identify attractively priced properties will, eventually, have the buying opportunity of a lifetime.

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.