Today, the Federal Housing Finance Agency announced that it will encourage Fannie Mae and Freddie Mac to work with banks and their servicing departments to help delinquent homeowners modify their mortgage loans. They also request that a moratorium be placed on foreclosure proceedings in which the homeowner contacts their servicer. Fannie Mae and Freddie Mac will encourage administrators with a payment of $800 for each change they make. Many bills have been passed in the last year to basically stop the bleeding of the national real estate market. Many of those bills have proven to be ineffective or, worse, useless. This bill is at least a move in the right direction.

Let’s first look at some key issues. Home values ​​were supposed to be of little importance and had little impact on the economy. These words were spoken by Greenspan over two years ago. Many economists expressed the same sentiment. The Fed’s position in recent years has been to sit back and watch, and only when cornered did they propose legislation. The collapse of the economy was inevitable as the very federal government allowed the banking industry to sink into an uncontrolled hole. Much of the content of many of the 2008 bills contained verbiage suggesting that lenders work with their defaulting borrowers. Banks have already been doing this. The moratorium on foreclosure proceedings suggested by today’s statement from FHFA Director James Lockhart is NOT new to the industry. Wells Fargo is among many banks that have had moratoriums on foreclosures for at least the past year. Servicing lenders will modify loans only when it suits them, as there is nothing mandatory for banks to comply with.

Something should have been done earlier, much earlier. It is my opinion that there are and have been better ways to repair some of the damage to our economy. The troubled housing market is the main reason for the economic downturn. Our tax dollars, to the tune of a trillion dollars, are now being used to recapitalize the banks. These are the same banks that are at the root of the problem. Therefore, our tax dollars are being directed by politicians and economists, most of whom have been in office for the past few years. One trillion dollars, let’s take another look at another way that one trillion dollars could be used to help in a recovery. Instead of giving the money to the banks, OFHEO should have created an office that directly bails out homeowners. Assuming there may be around 20 million homeowners in trouble, the pool of money would have been worth $50,000 to each homeowner. Most default situations can be fixed with less, some need more.

Now how would that help? Isn’t it still stealing from the rich to give to the poor, or socialism at its best? Sure, but since our tax money will be used independently, it might as well be used effectively. The reason this would work is that it would immediately stop all defaults and foreclosures. If a borrower was assigned an amount of money that would reduce their principal amount along with the lender modifying the terms of the loans, far fewer REOs and short sale homes will go into inventory for sale. This has an immediate effect on home values. Less inventory coupled with the availability of many viable home loan programs will provide a tipping point. It is the basic law of supply and demand. Over 70% of all listings in the state of California are distress situations.

Unfortunately, homeowners who have acted responsibly for the last half decade have to sit back and watch their home value have been cut in half in many neighborhoods due to the acts of the irresponsible and now they have to watch how the taxes they pay are to bail out the irresponsible.

To prevent repeat violations, the Fed should create a council to work on implementing national certification or licensing for anyone who works directly with borrowers. It is extremely unfortunate that thousands of unlicensed or formally trained loan officers were allowed to assist people in the most financially important transaction of their lives. Likewise, that same council should have the task of reviewing each credit program and certifying its security. Loan programs must be rated based on risk, complexity, and the potential or likelihood of misuse. Loans like the payment option arm should never have been made available to the general public. It was a loan for players, not the average homeowner, but unfortunately the Federal Reserve has turned a blind eye to this program for the past 20 years.

Basically, the FOMC regulates monetary policy. There should have been a bill to change his responsibilities a long time ago to include real estate as part of his oversight. Ultimately, it fell on his shoulders anyway.

Look for a positive 2009 after a slow start. Real estate sales in the second and third quarters are very likely to be stronger than expected, as many buyers have been waiting two years for their bottoming out. Fewer foreclosures and short sales will help boost sales prices and perhaps once again average homeowners can start to see their homes gain in value.