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Mortgage Future Now, Have One Later


Retirement savings may hold the key to solving the credit crisis.

If only home prices would stop plummeting, we could put this whole credit crunch nonsense behind us.

Unfortunately, a meaningful stabilization in property values is unlikely. Housing inventories are still at excessively high levels, unemployment is creeping up, consumers are stretched and mortgage underwriting guidelines are tighter than they've been in years. The outlook is bleak.

Left to the free market, these issues will take years to work through, as homeowners gradually scrape together the requisite finds to unbury themselves and banks grudgingly realize their losses. While this is the healthiest path economically, it's also the least acceptable politically.

Short of immediate, full-scale nationalization of the mortgage market through seizure of Fannie Mae (FNM) and Freddie Mac (FRE), there's little the government can do to halt the decline and stem the knock-on effects rippling through the national -- and indeed the international -- economy.

Much of regulators' efforts thus far have been aimed at solving the problem of negative equity, where a borrower owes more on his home than it's worth. Congress's recent housing bill allotted $300 billion for the Federal Housing Administration and other taxpayer-backed institutions to shoulder the growing burden.

Progress has been slow; the nasty realities of the situation have impeded plans that were largely ill-conceived to begin with.

Each day, thousands more homeowners find themselves underwater. Unable to sell without coughing up the difference between the unpaid balance on their loan and the sale price, borrowers are left with few options: Continue paying for a losing bet, fall behind and hope their lender will modify the loan, or simply walk away.

Banks like JP Morgan Chase (JPM), Wachovia (WB) and Bank of America (BAC) don't have many palatable choices, either. Loath to accept short sales (agreeing to a sale price below the loan balance and forgiving the difference) because their beleaguered balance sheets can't handle the pain, or to modify loans lest they anger securities investors, lenders are hoping they can just ride it out.

Mark Zandi, chief economist at Moody's, estimated earlier this year that as many as 10% of all U.S. homeowners, or 8 million borrowers, are upside-down. With the median home price hovering around $200,000, this means the true value of housing stock (around $1.6 trillion) cannot be determined.

Thus far, home prices on a nationwide basis have fallen around 15% (depending on whose data you believe), which means roughly $240 billion in home equity is yet to be wiped out - despite the fact that it no longer exists.
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