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Emac's Bottom Line

America's Credit Default Swap: You

Emac's Bottom Line FOXBusiness

The most famous patient in the history of neuroscience, a victim of "profound amnesia," Henry Gustav Molaison, died this year.

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Molaison could not remember anything beyond 20 seconds, a real life character straight out of the movie Memento.

Severe anterograde amnesia has also afflicted Congress and the homebuilders alike when it comes to what is aggravating the most severe economic downturn since the Great Depression.

What has gone forgotten and in turn unsaid is that the housing crisis is severely aggravated by the ballooning number of unsold homes, an inventory overhang now at 10 to 11 months and rising.

The overhang continues to act like an anvil around the neck of existing home owners nationwide, has dragged down home prices across the country, has helped speed the implosion of Wall Street as mortgage securities blow out economic circuits right and left, and is behind a farrago of taxpayer-funded bailout programs of the economy.

Overbuilding has led to bailout demands from all quarters of the economy. Now the name of the game is to get at the ever-open hydrant of taxpayer money now gushing through any one of the money kiosks the government has set up.

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Stop the Home Builders Now

America's credit default swap--an insurance contract on a potentially bad market bet--is now the US taxpayer.

Housing is in search of a bottom. We need a floor in home prices now. We need a floor in commercial real estate.

So stop the home builders and developers from building.

Yes, stopping them would hurt construction jobs, but those jobs can be saved by putting those employees to work in other ways--for ideas how, see below. Instead, the home builders and commercial property developers want a government bailout too.

Fewer homes mean existing home prices could resuscitate higher. Subprime securities have already been written down dramatically, but higher home prices could stop more writedowns--an estimated $600 bn more in writedowns coming soon.

Right now, foreclosed homes pose a security and health hazard, plus they waste energy. They turn into hotbeds of crime fast, wasting tax dollars to police.

Instead, you now see demands from developers and home builders to fix their manmade problems. Ara Hovnanian, chief executive officer of Hovnanian Enterprises, New Jersey's largest home builder, asks that the government now provide economic stimulus for the housing industry. "If government wants to get to the root of the problem, they need to fix housing first," he has been quoted as saying.

Despite the fact that the government for 70 years has oversubsidized housing, despite the fact that a government-distorted housing market is already getting a government bailout.

The Credit Crackup

Banks, Wall Street, hedge funds, you name it, will face a regulatory crackdown like never before with the incoming Obama administration.

Perhaps those laid off in record numbers on Wall Street will see redemption in new jobs as hedge funds hire laid off traders, investment advisers and portfolio mangers who know the intricacies of compliance reviews, as class-action lawsuits now proliferate like dandelions.

Tectonic shifts are occurring in the economy. The government is layering public debt on top of private debt to wish away the problems, using your tax dollars as novacaine to soothe jangled nerve endings, and is not letting market forces work.

If wasting money were a religion, Congress would be its cathedral.

Already, interest that taxpayers must pay on the federal debt amounts to $412 bn each year, the third largest expense in the government's operating budget, a sum that is more than the gross domestic product of Kuwait, Syria, and the United Arab Emirates combined.

Meanwhile, real estate turnover remains moribund.

Housing Data Continue to be Ugly

Existing home sales plunged 8.6% in November to 4.49 mn from a downwardly revised pace of 4.91 mn in October, according to the National Association of Realtors.

The median sales price fell by the largest amount on record, plunging 13.2% in November to $181,300, from $208,000 a year ago. That was the lowest price since February 2004 and the biggest year-over-year drop since the index began in 1968.

New-home sales fell a fourth time in a row during November, and prices remained below year-earlier levels.

Bulldoze Homes?

Instead of continuing these absurdities, The Wall Street Journal's Holman Jenkins and Forbes Magazine guest columnist Susan Lee, an economist, have both advocated that the government should instead use bailout money to buy and demolish foreclosed, unoccupied or half-built houses in selected severely depressed markets, instead of bailing out the financials via capital injections and toxic security purchases.

Bulldoze abandoned properties now exacerbating severely depressed neighborhoods, and instead rehab the properties and turn them into parks, playgrounds, or any other community-based dwelling.

Again, the 11-month housing supply overhang, concentrated notably in just four states, has poisoned the market for mortgage-backed securities and destabilized credit markets around the globe.

Jenkins says this isn't as wild-eyed as it sounds, noting that Ben Bernanke had pointed out in a speech that such programs already are at work in the Midwest. "In highly depressed housing markets, the worst-quality units are often demolished to mitigate safety hazards and reduce supply," Jenkins quotes Bernanke as saying.

Similarly, Jenkins notes that Baltimore has a program involving the demolition of foreclosed homes. Cleveland spends $6 mn a year to demolish homes as well, he says.

Bulldozing could be targeted at distressed abandoned neighborhoods with zero hope of recovery any time soon. It can be stopped as needed too, he says. Subprime-financed overbuilding was concentrated in four states--California, Florida, Nevada and Arizona--so much so that the Mortgage Bankers Association says they "skew the national data," the WSJ's Jenkins notes.

Lee says: "Let's take the median price of a home at $221,900, as it was in August, then add in $10,000 for demolition and disposal (the average price for such activities) and then--just to bias the figures against the scenario--let's gross it up to a cost of $250,000 per house.

Result? The $700 bn for the bailout could be used to buy and bulldoze 2.8 mn homes." That's more than only 2.3 mn homes now vacant and for sale, Lee says.

Lee notes that prices for remaining houses would rise as "scarcity whets buyers' appetites." Yes, the "main thing wrong with this idea is that it involves destroying value to create value," Lee notes.

But the problem is, prices are still too high for the market to clear, and at the rate the bailout is going, it will take a while before prices fall to the point where demanders can meet suppliers in satisfactory transactions, Lee says.

Another Thoughtful Solution

Robert Simpson, a real estate expert with RWS Consulting, also says the government can stop the home builders from building by instead issuing tax credits to them in order to let them convert foreclosed homes into affordable rentals. Doing so could reduce "supply in the same manner as bulldozing them. It also creates jobs and provides liquidity to the banks," he says.

Let home builders buy these properties back from the banks at another 20% to 25% discount, rent some and sell the rest if they can to make a profit. And record them on local property records as a zero "transaction so not to effect local real estate ‘comps,'" protecting existing home prices, he says.

An Upside-down Approach

Instead, we've got an upside down bailout approach, where we use tax dollars to refloat lenders and borrowers who sunk themselves into a new, poisonous kind of mortgage that allowed dangerous bets that home prices would defy the laws of physics and soar to the stratosphere.

In 2005, a huge one out of seven new mortgages were "no down payment, no income documentation" loans, Jenkins notes, meaning, bets on eternally rising home prices.

So, with no skin in the game, borrowers aren't walking away because their rates are resetting higher or because they have suffered job or income losses, it's because they can say hey, why throw their money down a rathole of a mindless mortgage.

AmericaOversubsidizes Housing

Why are we letting the home builders and commercial property developers run amok?

For seven decades, Washington has over-subsidized an overgrown, weedy housing system. Fannie Mae, Freddie Mac, the Federal Home Loan Bank System, the Community Reinvestment Act, the S&Ls, tax credits, mortgage interest deductions, reduced capital gains taxes, all have encouraged colossal housing debt.

And right now, we're headed in exactly the wrong direction, using tax dollars from responsible taxpayers to bail out the halfwits, a massive government-backed blessing of irresponsibility, that housing debt is fake debt, don't worry, you don't need to repay your debts, because the US taxpayer is always there to bail you out.

Even now, Fannie and Freddie are under orders from Congress to chuck more money at mortgages as the two veer towards penny stock status, ever since the government seized them several months ago.

Don't forget this dereliction-recent Congressional testimony revealed that a Fannie Mae document from March 2005 quoted a Fannie official as saying: "Although we invest almost exclusively in AAA-rated securities, there is a concern that the rating agencies may not be properly assessing the risk in these securities." But Fannie and Freddie willy-nilly plunked money down to buy this junk anyway, all in the name of affordable housing.

Homebuilders Can Weather the Storm?

Homebuilders such as Centex Corp., Pulte Homes and Hovnanian Enterprises have taken a hit for their poor judgment.

Hovnanian (HOV) shares are down 70% over the last year, hitting as low as $1.70. Costs for credit default swaps on the homebuilders are zooming higher. JMP Securities has reportedly said that HOV is a ``bankruptcy risk" due to debt and exposure in the hardest hit real estate markets.

But other homebuilders such as Toll Brothers and MDC Holdings have some breathing room because they are fairly liquid, says the Wall Street Journal, Fox Business's sister publication.

Toll Brothers, a builder of luxury houses, has $1.6 bn in cash and $2.1 bn of debt, has sufficient cash holdings to retire obligations through 2014 and its shares are up 8% this year, the WSJ says.

MDC has $1.2 bn of cash and $1 bn of debt. MDC's shares are down 16% for the year, but that's a fraction of the 39% decline in the S&P MidCap 400 index, the WSJ notes.

Developers Want TARP Money

The biggest property developers and commercial real estate lenders have joined the Federal Tin Cup line asking for a piece of the government's new $200 bn loan program run by the Federal Reserve, which is supposed to bolster the market for credit card debt, auto loans and student loans.

A record $530 bn in commercial real-estate debt is coming due for refinancing in the next three years, Foresight Analytics says, with $160 bn in the next year alone.

Bad bets taken out in the form of debt to build condos, shopping strip malls, hotels, you name it. Debt set to default and go belly up in record amounts. If the debt isn't refinanced, the lender seizes the property.

The lenders' complain they can't take back onto their books all of this concrete given how distressed their balance sheets are already.

When he announced the new lending facility to help the credit card, auto and student-loan markets, Treasury Secretary Henry Paulson said it could be expanded to provide assistance for "commercial mortgage-backed securities."

Getting Under the TARP

And a growing number of companies that own industrial loan companies are racing to transform themselves into bank holding companies to be eligible for the $700 bn in taxpayer money sitting in the TARP program.

Within hours of the government's approval of its application to become a new bank holding company, commercial financial firm CIT Group said the government gave it preliminary approval to obtain $2.3 bn out of TARP.

Goldman Sachs Group, Morgan Stanley and American Express have all asked to become bank holding companies to get at TARP money.

GMAC, owned by General Motors and Cerberus, the private equity fund, is also trying to become a bank holding company, too. GMAC provides financing for GM vehicle and dealer loans along with home mortgages. At least four insurance companies have bought banks to get at TARP money, too.

To date, the government has spent the first $350 bn of TARP funds by giving money to 211 financial institutions, says Richard Suttmeier, bank analyst at ValuEngine.

That includes 147 regional banks overexposed and in contravention of federal regulatory risk guidelines ordering them to not lend out construction and development loans far in excess of their regulatory capital cushions.

Taxpayers Hit with Higher Taxes

Instead of letting market forces work, irresponsible local and state governments across the country want to hit you with higher taxes. Higher taxes on purchases of satellite TV, cigars, clothes, soft drinks, gas, car licenses, even a fat tax in New York, are all on the table. Higher property taxes. Higher federal taxes under an Obama administration too.

And for those who voted for elected officials so quick to tax, remember what Saint Teresa of Avila said: "More tears are shed over answered prayers than unanswered ones."

As taxpayers fight to keep their households above water during one of the worst recessions this country has ever seen.

As tuition costs and health care costs soar. As fatcat academics continue to sit on huge endowments spent on 24-7 cafeterias and art collections and posh teacher lounges and not on helping struggling families pay their children's college tuition.

As government bailouts grow while no money is being spent for better health insurance for the poor, and the lower to middle class families who continue to get rejected for insurance coverage by faceless, mindless, bottomline-obsessed bureaucrats sitting in gray offices several states away.

A Merry Christmas from EMac

I wish you and yours a truly blessed and a very Merry Christmas.

I thank you for your kindness and your thoughtfulness in writing to me, in responding to my stories. I read all of your emails, and I remain impressed with your intelligence, passion, and care.

You care about what is good and real and right and true. I am truly blessed. I am here for you, looking out for you.

Your wit and intelligence bring to mind this thought:

"Describe things as better than they are and you'll be called a romantic, describe them as worse than they are and they'll call you a realist, describe them exactly as they are and you'll be thought of as a satirist."--author Quentin Crisp.

Merry Christmas, Peace, and Joy, EMac

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