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Tuesday, October 25, 2011

Obama's New Housing Aid Epic Fail

President Obama announced the lifting of certain restrictions on banks in the hope of encouraging banks to refinance some underwater mortgages. This latest plan will cost the banks and some investors in bundled mortgage-backed securities, and do next to nothing to rescue the housing market. It will be, in short, nothing but false hope and a temporary stopgap for a few.

The housing crisis is perceived that way only by current homeowners who have suffered huge price declines averaging 31 percent nationwide. If you are a first-time buyer with a FICO score in the high 700s and can put down 20 percent, this is no crisis; it's a godsend.

Let's call the housing crisis what it really is: an erosion in current values which shows no sign of stopping. Cutting monthly payments to forestall foreclosures is a last-ditch effort to reduce the growth in the supply of homes for sale.

The problem is that too many owners -- and this now means the banks holding the mortgages -- want to dump their properties. This impulse to sell will stop only when:

(a) prices go and stay up, which is not expected for years;
(b) universal principal reduction restores equity to homeowners, delaying the problem until further erosion puts up back where we are today; or
(c) the government enacts barriers to sales of existing or new homes which, in seeking to block new supply, eviscerate the demand to purchase real estate as an investment.

The imbalance between supply and demand will correct only when demand rises to meet the glut of homes on or ready to hit the for-sale market. Unfortunately for current homeowners, this requires a significant drop in real estate prices. Efforts to stop or delay this drop will only prolong the housing sector depression and current overall economic recession.

Eric Dixon is a New York investigative attorney, entrepreneur and investor who handles due diligence and management issues for businesses, investors and individuals.

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