The Binary Circumstance

From CNBC:

Two new Federal Reserve programs aimed at easing consumer credit and lowering mortgage costs have pushed the potential bill for US financial rescue efforts to about $8.317 trillion, although far less has been committed so far and money extended might not be lost.

The article lists the commitments that the government has already piled on the taxpayers and with each passing day, new programs are being announced. Therefore, I doubt this is the final tally.

The latest addition is the myriad of bailout programs is the $600 billion dollar plan to purchase mortgage-backed securities. The announcement caused a record decline in mortgage interest rates which are now below 5%, a drop of 1 1/8% in one day.

Such low interest rates will no doubt get a lot of buyers off the sidelines to actually buy homes. In addition, many homeowners will refinance, freeing up cash for other purchases. Does government-sponsored artificially low interest rates and opportunities to use homes as ATMs sound familiar? Yes indeed. Those are two of the factors that got us into this mess.

At best, it seems like it can temporarily re-inflate the housing bubble. Long-term, who knows? At some point reality always comes back into play and that’s when things built on a foundation of fantasy collapse.

I have examined all of the known superstitions of the world and I do not find in our superstitions of Christianity one redeeming feature. They are all founded on fables and mythology. Christianity has made one half the world fools and the other half hypocrites. – (Thomas Jefferson / 1743-1826)

Source

From Yahoo News/Reuters:

NEW YORK (Reuters) – Nearly one in five U.S. mortgage borrowers owe more to lenders than their homes are worth, and the rate may soon approach one in four as housing prices fall and the economy weakens, a report on Friday shows.

About 7.63 million properties, or 18 percent, had negative equity in September, and another 2.1 million will follow if home prices fall another 5 percent, according to a report by First American CoreLogic.

The data, covering 43 states and Washington, D.C., includes borrowers nationwide, even those who took out mortgages before housing prices began to soar early this decade.

Seven hard-hit states — Arizona, California, Florida, Georgia, Michigan, Nevada and Ohio — had 64 percent of all “underwater” borrowers, but just 41 percent of U.S. mortgages.

This is a really big problem and you will see the government and banks moving more aggressively to adjust mortgages to keep people in their homes no matter who gets elected president.

Even a small decline in value from this point will put 25% of mortgages underwater.

The problem is that all the governement intervention in the market so far, which created the bubble in the first place, has distorted housing values to the point that nobody really knows what the real value of a particular home is. If you don’t know its value, it is very difficult to figure out a “safe” value for a new mortgage. If housing prices continue to fall after an adjustment, there’s nothing to keep the house from going underwater again.