It looks like a lot of homeowners are getting an early Christmas present. Here's what Bloomberg is reporting:

"Mortgage companies Fannie Mae and Freddie Mac and Citigroup Inc. plan to cut home-loan payments for hundreds of thousands of borrowers facing foreclosures, following similar moves by the nation's biggest banks.

Fannie Mae and Freddie Mac will reduce principal or interest rates on some loans and extend the terms of others, according to the Federal Housing Finance Agency, which seized control of Fannie and Freddie in September."

Now that the government has bailed out the banking system, it can concentrate on housing, the auto industry, the airline industry, the coffe industry, etc., etc., etc.

The WSJ had an interesting article today on how the the FDIC, through Indymac Federal Bank is testing a program to adjust mortgages to help people stay in their homes. The idea is to prevent foreclosures, which are expensive to banks, as well as keep people in their homes. Not everyone qualifies to have their mortgage adjusted. You must not be able to afford your home, must be delinquent, and the bank must not be able to sell the house at a profit in foreclosure. In other words, the property and owner must be in terrible shape.

Here's one sad example from the article:

"Nanci Puerto, a 40-year-old house cleaner in Antioch, ran into such a problem. She refinanced her house for $637,288 from IndyMac in 2006, taking out cash for a down payment on another property. She and her husband, who works in a machine shop, take home a combined $70,000 a year."

How can someone with a combined salary of $70,000 expect to afford a mortgage of $637,288? The general rule of thumb is to buy a house that is between 2-3X your annual salary.

It doesn't seem that anything the FDIC does would keep someone with these stats in their home. While I emphathize with people losing their homes, I wonder if we all wouldn't be better off simply taking our medicine and letting the market adjust quickly, rather than trying to subsidize everyone and artificially propping up unsustainable situations.

Here's the central problem in the credit crunch that has gripped the world. Housing prices keep falling and the news doesn't get any better. The WSJ just published an article that says that 1 in 6 homeowners owe more on their mortgage than their home is worth.

"The result of homeowners being "under water" is more pressure on an economy that is already in a downturn. No longer having equity in their homes makes people feel less rich and thus less inclined to shop at the mall.

Until this has run its course nothing the governmnet does will really solve the problem. The bubble has burst.

Of course, there is a bright side. If you are a first time buyer or were wise enough to wait out the housing bubble, you'll get a much better price on a house. You just need to make sure you can get a mortgage.

At one point between the 20th and 30th minute of last night's vice presidential debate, Joe Biden was talking about the economic crisis. He ended his response by saying that the government should change not just the outstanding interest rate where a borrower had bought a home that they couldn't afford, but also should have the ability to change the outstanding principal of the loan (or the mortgage balance).

Now, I am entirely in favor of doing everything possible to keep people in their homes, but we are speaking about grown ups who knowingly and consciously entered into arrangements to purchase a home. It is a stretch to say that their financial illiteracy caused them not to understand the mortgage terms, but a much greater stretch to say that they did not understand that the price that they were paying was high.

Where is the accountability in our system? How does the government propose to compensate those who rented instead of purchasing? Or, those who purchased smaller homes and lived within our means during the housing bubble?

The Democrats are promising the world. They are making more promises, while they should be making fewer.

If we go in this direction, then I fully hope that Barack and Joe will indemnify me for all of the mistakes that I have made in my life. My software company failed after I sunk a fortune into it. I have gotten killed over the last year in all of my stock market investments. I spend a fortune on a divorce. My large SUV has devalued dramatically since I purchased it because gas prices have spiked up.

I am waiting for Barack and Joe to cut me a check to make me whole. :)

As part of the Housing and Economic Recovery Act of 2008, the IRS authorizes a deduction of up to $7,500 for qualified first-time homebuyers. That means that if you quality, and we'll talk about that in a minute, the IRS wil give you $7,500 to offset any tax you might owe, will pay you the different between what you owe and the $7,500, or will cut you a check for the $7,500 if you don't owe any taxes.

This is an important point. It means that the IRS will be cutting some homeowners checks, depending on your tax liability for the 2008 or 2009 year. If you owe nothing to the government, you'll get a check for $7,500 at no interest. You can apply that to your house and have $7,500 of your mortgage in a 0% loan.

Here are the basic things to know about the program:

• The tax credit is available for first-time home buyers only.
• The maximum credit amount is $7,500.
• The credit is available for homes purchased on or after April 9, 2008 and before
  July 1, 2009.
• Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit.
• The tax credit works like an interest-free loan and must be repaid over a 15-year period.

It's important to realize that this is not a typical tax credit, but rather a loan. The IRS webpage on the tax credit states:

"Home buyers will be required to repay the credit to the government, without interest, over 15 years or when they sell the house, if there is sufficient capital gain from the sale. For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. The home owner does not have to begin making repayments on the credit until two years after the credit is claimed. So if the tax credit is claimed on the 2008 tax return, a $500 payment is not due until the 2010 tax return is filed. If the home owner sold the home, then the remaining credit amount would be due from the profit on the home sale. If there was insufficient profit, then the remaining credit payback would be forgiven."

So, it's important to remember that this is really a 0% loan that is being administered via the IRS for simplicity purposes. The intent of the loan is to help buyers afford a new house. The IRS states that:

"Assuming an interest rate of 7%, that means the home owner saves up to $4,200 in interest payments over the 15-year repayment period. Compared to $7,500 financed through a 30-year mortgage with a 7% interest rate, the home buyer tax credit saves home buyers over $8,100 in interest payments."

The program was thrown together pretty quickly and there are still some details to work out. Michelle Singletary of the Washington Post posed some common questions to IRS representative Erik Smith that showed the IRS still has some work to do.

What's clear from the conversation is that the IRS hasn't fully thought through the implementation of the program. For instance:

Michele: Since this is a loan from the IRS, will the IRS be sending an annual loan statement to taxpayers?

Erik: The details of how the IRS will collect this money or inform people have not been worked out. Smith said a line would probably be added to the standard 1040 tax form to indicate that the credit should be paid as part of your tax liability.

Michele: Can I Pay Off the Loan Early?

Erik: The IRS hasn't yet come up with a system to accommodate an early payoff.

So, if you take the offer, you should realize there might be a few hiccups while the government works through the process. Still, if you are planning on buying a home, this looks like a way to finance at least $7,500 at 0%. That's a good deal to me.

The NY Times has in interesting article about the different economic models used to predict the bottom of the housing market. It goes into a bit of description of each and then ends with this line:

"I try to avoid house price forecasting,” said Paul S. Willen, senior economist and policy adviser at the Federal Reserve Bank of Boston. “Let me just say this, as an economist, that asset pricing is something we’re exceptionally bad at.”

In other words, no one really knows.

The mortgage and housing crisis is not limited to subprime borrowers and people with bad credit. Plenty of people with good credit overextended themselves with risky mortgages and houses they couldn't afford. The lackluster economy isn't helping. Indymac wasn't brought down by bad credit, but by Alt A mortgages. Those are mortgages to people with good credit who just haven't documented their income.

Now, word is out that people with Prime mortgages, the largest mortgage category are falling behind. The NY Times writes:

"Homeowners with good credit are falling behind on their payments in growing numbers, even as the problems with mortgages made to people with weak, or subprime, credit are showing their first, tentative signs of leveling off after two years of spiraling defaults.

The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time."

As the article says, prime loans are the biggest part of the $12 trilion mortgage market. If these run into trouble then say goodbye to a couple more banks.

The biggest problems are coming from interest only loans. Homeowners get a couple of years to pay interest only and then their payments step up once principle is included. Those step-up payments are hitting now and many borrowers find themselves paying more for a house that it underwater. Some can't afford the more expensive payments and can no longer refinance, and others are just walking away.

According to one analyst:

"Subprime was the tip of the iceberg,” said Thomas H. Atteberry, president of First Pacific Advisors, a investment firm in Los Angeles that trades mortgage securities. “Prime will be far bigger in its impact.”

Gulp.