NEW HOUSING CRISIS LOOMS AS ECONOMY WORSENS

We believe the residential real estate market is in dire straits as an unintended consequence of an attempt to indiscriminately stop housing foreclosures by federal and some state governments.  While there has been an increase in housing prices over the past few months, this is a result of a downstream trickle below the logjam of the flood of pending and new foreclosures caused by restricting distressed properties from coming to market. 
What was designed to assist homeowners in distress has had the polar effect and made conditions far worse.  Bankers can delay showing their losses on the short term, but the market value of their balance sheets worsen daily as bank failures accelerate.  Meanwhile the unemployment rate far exceeds the unaccetable government reporting of above 10.2%. The true unemployment rate reached an astonishing  22% in October 2009. when you count discouraged workers out of work for a year or more.
Portions of Dept of Treasury Making Home Affordable (MHA) are fatally flawed and there is an urgent need for a correction to be implemented immediately.  In a majority of cases, where the home is severely upside down or underwater, MHA would more appropriately stand for Making Home an Albatross.
Yet, this is precisely what Treasury is doing with its Making Home Affordable (MHA) program with its two new subcategories: Home Affordable Refinance Program (HARP) and Home Affordable Modification Program (HAMP).  
HARP has raised the negative equity limit from its original 105%, to currently being upside down by 125%., i.e. if your home is worth $200,000, your first mortgage can be as high as $250,000.  Any 2nd or 3rd mortgage that would increase your negative equity, it doesn't really matter.
With HAMP, which is designed to modify loans for homeowners substantially behind on their payments, it doesn't matter  how upside down or underwater your mortgage is. The ratio of what you owe on your property to what your property is worth is simply not addressed.
Treasury Secretary Timothy Giethner announced signups for MHA trial program now exeed 500,000 but you can bet the ranch that well in excess of 90% are carrying an extremely heavy negative equity.  If that is true, the homeowner is merely engaged in the program to buy more time until he is foreclosed upon; or when he awakes from his slumber, he will be looking for ways out of the program.  In either event, future foreclosures are building up like a flooded river behind a logjam, and will ultimately burst through unless a more thoughtful approach is taken.

The homeowner may owe tens or hundreds of thousands of dollars more than his property is worth.  Even so, Lenders are now encouraged and compensated to try and find a way to keep the borrower in their home.

Since congress has ruled out mandating a principal reduction to FMV in these cases (which I happen to believe is the best solution, if the homeowner can then afford it), then a limit should be placed on the amount the property can be underwater; say 110% of FMV. 

This state of affairs does not need to exist, and it will not cost the government a trillion dollars to right the ship.  They simply need to have lenders request local real estate brokers to ascertain FMV of a property with a non-performing loan, and if exceeds 110% of their mortgage(s), either the lender(s) reduce the principal within that range, or the property should become available for an immediate short sale or foreclosure.

In the absence of such a restriction, the government is in the process creating in MHA loan modification, a scattered ghetto of  3 to 7 million homeowners underwater on their mortgages  and growing.
who will then have no incentive to maintain their homes beyond minimal living requirements or to make substantial upgrades or repairs to their properties when needed. As an owner, I would not make a significant investment in such an underwater property, would you?  Would you put a new carpet or a roof on your home if you had a negative equity of $50,000 to $250,000 or more?

Unless there are extreme extenuating circumstances, the acutely underwater homeowner will always better him / herself by  selling the property short, after negotiating a simple account settled to be placed on their credit file, and not accepting any personal notes for the deficit on the loan.  Most real estate agents experienced in short sales can accomplish this feat at no cost to the distressed homeowner.  The former owners can then re-enter the market at some future date a year or so down the road and buy a home comparable to his former home or one that he can now afford at FMV.  They will have shed the millstone of the heavy negative equity.

Pride of home ownership will disappear for those who are locked into mortgages which they can (artificially) afford, but are underwater by tens or hundreds of thousands of dollars --- with no hope of ever acquiring equity in their home; with no ability to sell their home with any expectation of a profit; no ability to access any equity for home improvement, or higher education for their child, nor any hope for a retirement benefit when downsizing after faithfully paying on the mortgage over time. Equity in home ownership has been the engine that has driven our economy since the end of WWII.  What do we have in mind to replace it?

Now government has stepped in and slowed foreclosures (while doing nothing to prohibit lenders from stonewalling short sales although they promised to streamline the short sale program in March 2009) and is in the process of creating a behemoth of foreclosures that will slowly trickle into the market, while promoting de facto upside-down government created subprime loans. If uncorrected, they will ultimately put the housing market and our economy into full collapse.

We need to act now by demanding that Treasury sets a limit on how much negative equity a homeowner can have, and still be eligible for the program.  We think 110% of value should be the outer limit for (all) mortgage(s) on a home, compared to a home's current FMV, because we are very unlikely to see an appreciation of greater than 2% on average over the next 5 years on homes given the dire state of housing.  Therefore, if an owner emerges from a 5 year loan modification plan, he should be at least be at a break even value in mortgage outstanding vs. FMV of his home.
Foreclosed homes or short sale homes sell quickly on the market in California and other states, when they are priced at FMV and the lender is cooperative in moving the sales process along. As a matter of fact, the housing shortage of available homes on the market has grown to such an extent, that there is a bidding war when homes do become available.
Please consider signing our petition (letter) to Treasury Secretary Timothy Giethner requesting the needed changes outlined above.
Our goal is to raise 25,000 electronic signatures.  Won't you please help by reading our petition and signing it if you agree? 

If you disagree with a portion or all of our comments, please let us know with your comments.  We are not above modification if persuaded by logic. 

What our nation cannot afford is fence sitting and inaction. To do nothing invites this century's great depression!