This morning I was watching CNBC and they had David Seiders, Chief Economist for the National Association of Home Builders who was pressing the case for the passage of the Housing Stimulus Package that is currently moving it's way through Congress.

And while I am in favor of government action to fix the housing/mortgage crises, I think that this is the wrong way of going about it!

While not a lot has been released about the bill, Congressional aides have let it be known that tax credits are to be a major component of the measure and this is where I start to smell something rotten.

You see, as I've written about before, it's not the housing markets that are causing the problem here!  It's the credit markets!  Until the credit markets crashed and burned, the housing markets were doing just fine!

If they were to address the issues that the credit markets are facing, then the housing markets would come roaring back to life and there would be no need for tax credits to encourage people to buy. 

Instead of giving tax credits, which the majority of Americans wouldn't be able to take advantage of, they should create a fund to purchase the sub-prime mortgages that are causing the majority of the foreclosures. 

Having purchased these mortgages (at a steep discount, by the way) they could renegotiate the terms so that the folks who were in these homes would be able to afford them.  After a seasoning period where the home owners would be able to demonstrate that they were able to make their payments in a timely fashion, the government could then sell these now performing mortgages back into the secondary mortgage markets. 

The profits from buying and selling these mortgages could be used to offset any losses that the fund would incur due to loans that didn't perform.

Another idea would be to create a government backed mortgage insurance fund that would allow lenders to relax underwriting guild lines back to a point where you didn't have to be perfect in order to buy a home.  FHA already serves this purpose to a certain extent, but not to the point of being able to replace what the private mortgage insurance companies were doing before they got caught with their hands in the cookie jar.

Remember, it wasn't the Fannie/Freddie loans that caused this situation.  Even the "level approval" loans have performed amazingly well.  The only reason that the private mortgage insurers have pulled back from insuring PMI policies for high LTV mortgages is because they are having liquidity problems due to their exposure to the sub-prime markets.

By replacing this lost liquidity, the credit markets could return to rational lending practices and as I've pointed out above, the housing markets will come roaring back!

R.B. "Bob" Mitchell

ValueList Real Estate Services, Inc.

Bob Mitchell is president of ValueList Real Estate Services,  St. Louis' largest discount/full-service real estate and mortgage company.  If you would like to find out more about Bob, ValueList or our flat-fee listing program, please feel free to visit our web site at valuelistre.com