Fannie Mae (FNM) and Freddie Mac (FRE) announced that they will suspend foreclosures of occupied homes until early 2009. That appears to be an excellent way to stop the increase in evictions and bring some stability to housing prices. The two agencies own or have some level of control over roughly 50% of US mortgages.

The problem with the Fannie and Freddie initiative is that there is no end game. It delays but does not solve the market’s great problem which is that too many homeowners cannot pay mortgages either due to mortgage interest rates resetting at extemely high levels or that their ability to pay has been compromised because of a job loss.

The federal government’s new Streamlined Modification Program for renegotiating mortgages begins on December 15. The goal of the project is to bring monthly payments down to a level where they are not more than 38% of a homeowner’s gross income.

While the government is busy going about its business, several banks, notably JP Morgan (JPM), have set up their own plans to help homeowners. The large bank will review $70 billion in outstanding loans in the hope of modifying those that it can realistically reset without too deeply compromising its own financial interests. As many has 400,000 homes could be affected, but that is a press release number. The number of mortgages altered could be a small fraction of that.

The Treasury is clearly trying to use its bully pulpit to get banks which took part of the $700 billion bailout fund to "pass that through" some of that capital to troubled homeowners. Unfortunately, these actions cannot be mandated to the financial firms, they can only be suggested.

The issues of falling home prices, foreclosures, and mortgage modifications will not be effectively addressed until there is common program which can be used across both government agencies and banks which originate and hold home loans. The scatter-shot approach will only succeed in addressing a portion of the trouble by offering improved loan opportunities to some homeowners while leaving others behind, offering resets on payments for citizens who cannot afford to pay 38% of their income to remain with a roof over their heads but could pay 35%.

The most frequent complaint about the Paulson bailout is that it has brought a degree of socialism to the financial and credit systems. If that is so, then the capital put into the private banking system might as well be applied evenhandedly across the length and breadth of the housing market and not bit-by-bit, bank-by-bank, and agency-by-agency. Several plans to solve the problem are equivalent to no solution at all.

The FDIC, the Fed, and Treasury have the chance to alter this random approach to solving the housing problem by creating a sound and systematic approach. Instead, they continue to squabble among themselves about the application of government funds for mortgage rescues.

As long as this fighting goes on, housing prices will continue to spiral downward.

Douglas A. McIntyre

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