Why People Still Matter

This morning, the Treasury began writing the checks under the bailout plan. $125 billion as a stock purchase to nine of the largest U.S. banks. Another $125 billion is slated for larger regional banks later this year. This “partial nationalization” effort will eventually include a nine figure purchase of bad assets from these financial institutions as well. Nothing for local banks. Nothing for people. Nothing for homeowners. Market reaction (the “truth detector” of business)? Instantly down on this news of course; the market rose later (part of the up-and-down volatility that won't end soon) based on news that sales of new single-family homes rose by 2.7% in September (mostly distressed properties at bargain rates, unfortunately), and then, the market flipped and ended “down.”

It will take months, by Treasury’s own assessment, for this bailout money to trickle down into the grassroots problems that need attention “yesterday.” That’s assuming you believe in that “trickle down theory.” Helping “people” seem too difficult, so why even try? Payrolls will go on bouncing checks, lay-offs will accelerate, and foreclosures will grow as housing prices continue to tumble.

Alan Zibel of the Associated Press wrote an article yesterday as to why the mortgage mess is so hard to fix. There are so many complications – such as investors for whom “fixing bad mortgages” means reducing their investment portfolio of “bad” subprime mortgages (and they're threatening to sue anyone who tries to fix this!), housing speculators who have no vested interest in home ownership and who walk away when their real estate is worth less than the mortgage, and there are lots of folks who chipped away at the truth to get loans they really knew they should not be getting.

Here are Zibel’s facts:

1. “Each day from July through September, more than 2,700 Americans lost their homes in foreclosure… That number, up from 1,200 a day a year ago, is a sign that the mortgage industry and government programs have done little to help troubled homeowners.”

2. “More than 4 million homeowners with a mortgage were at least one month behind on their payments at the end of June, according to the latest data from the Mortgage Bankers Association, and a record 500,000 had entered the foreclosure process.”

3. “The median home price in the U.S. dropped 9 percent in September from a year ago to $191,600, and is down 17 percent from the peak in July 2006, the National Association of Realtors said Friday.” California and Nevada were hardest hit.

4. “Already, 23 percent of homeowners with a mortgage owe more on their loans than their homes are worth, and that figure is expected to rise to 28 percent by this time next year, according to Moody's Economy.com.”

5. “The No. 1 reason people fall behind on their mortgage is loss of a job, or some source of income, perhaps from a divorce or death of a spouse. If a borrower is unemployed, lenders don't have many options but foreclosure… Two years ago, about 36 percent of mortgage delinquencies were caused by loss of income or unemployment, according to research by mortgage finance company Freddie Mac. But that number has risen to 45 percent this year as the unemployment rate has ticked up to a five-year high of 6.1 percent.” And it’s going to go a lot higher.

Which brings me back to why this meltdown has to be addressed from the bottom up… the markets cannot turn around unless the underpinnings of our economic system are solidified first. You don't build a house from the roof down; you need a solid foundation. Past blogs have focused on the specifics – how you actually start from the bottom and work up. People who say this is just too tough to deal with at the bottom so we might as well fix the top first just don't understand – sooner or later it’s the people who support the system that need the help… and then … well, the system will begin to work again.

Holding and creating jobs (and making sure payrolls are funded) is priority one, and stopping foreclosures and resetting interest rates and principal balances for solid and creditworthy homeowners is priority two (the federal government should focus on that portion of the real homeowners’ value that is below the loan value!). Everything else is down the list!

I'm Peter Dekom, and I approve this message.