The Housing Crisis and Washington's political and ineffective response

Today, one of the Treasury boys actually said that, "... the nature of the housing crisis has changed over the past year...". This shows how completely clueless they are at Treasury and the Fed (or more likely, how politics rules over economic common sense). The housing crisis exists today for the same reason it existed two years ago: the value of housing has fallen such that too many homeowners have lost a substantial portion of their net worth the fall of their homes' values such that they now have no equity or negative equity in their homes. Compounding this loss of net worth is their losses suffered in the securities markets.The negative effect of this situation is compounded by the high real unemployment which approaches 20%. Thus, while we have an over supply of homes, we also have a dramatic undersupply of equity available to buy a home. Compounding this, it is virtually impossible to get a mortgage in excess of $730,000, and many homes in the US are at values in excess of $1 million. Sadly, while Washington has "saved" the banking system, they have not even scratched the surface of the housing crisis, and political posturing which includes statements like another one made today, "...only $50 billion of TARP went to housing...", only serve to scare the heck out of any semi-informed individual. My reference here is to the various Treasury maneuvers that have moved some 90% of US home mortgages to the GSE's who now have an unlimited pen from the Treasury and who have used it to dramatically increase the proportion of sub-prime loans on their books in the past two years. So in fact, Washington's total response to the housing crisis in the past two years has been enormous, but political and ineffective.

Virtually all players in the CRE industry, securities and banking sectors agree that we need the CMBS market to return to functionality as soon as possible (even the politicians want this).

The CMBS market cannot recover its value to the world until the uncertainties that now exist are cleared up, and litigation between the parties is the most certain way to achieve this. Factors that are pushing for a litigation between Special Servicers and CMBS bond holders of different seniority (tranches) include steadily increasing mortgage loan delinquencies that show no sign of lessening, the huge dollar volume of CMBS loans ($770 billion) , PSA agreements that put Special Servicers in an untenable position with respect to conflicts of interest that they are supposed to ignore (read as in "law suit"), B piece owners who are also Special Servicers who have an obligation to THEIR investors and will be inclined to argue that obligation as superior to that owed other more senior bond holders, Senior bondholders who believe that their position is being injured by delays in foreclosure and sale that may benefit the Special Servicer and/or B bond holders and the always murky question of what liability the Special Servicer may have to mezzanine lenders who argue that the actions of the Special Servicer that benefit the Special Servicer are damaging to the mezzanine lender.

The sooner these issues are cleaned up, the sooner we can see the revival of the CMBS market and the CRE market that relys on it for liquidity, now more than ever.