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The WSJ is starting to “get it” when it comes to housing:

Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic, a real-estate information company based in Santa Ana, Calif.

….

Home prices have fallen so far that 5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home’s value, the First American report said. More than 520,000 of these borrowers have received a notice of default, according to First American.

….

Homeowners in Nevada, Arizona, Florida and California are more likely to be deeply under water, according to the analysis. In Nevada, for example, nearly 30% of borrowers owe 50% or more on their mortgage than their home is worth, said First American.

More than 40% of borrowers who took out a mortgage in 2006 — when home prices peaked — are under water. Prices have dropped so much in some parts of the U.S. that some borrowers who took out loans more than five years ago owe more than their home’s value.

This is the consequence of making loans that you have no reasonable expectation can and will be paid on the original terms.

Folks, this is really quite simple when you distill it all down.  It comes down to the underlying free-market principle of sound lending:

The check and balance for both borrowers and lenders against making or taking out bad loans – that is, loans that you will not be able to pay as agreed – is that both lender AND borrower will go bankrupt.

The gross injustice in our nation today is that over the last twenty years we have increasingly forced borrowers who take out bad loans to not only go bankrupt but be unable to discharge their debt, so long as they are individuals.  The corporate bankrupt, however, maintain their “corporate veil” and thus can file Chapter 11 – or 7 – with impunity.

This is the root of the problems in our economy.  It is the root cause of the credit bubble.  It is the root cause of the housing bubble and the ridiculously-pumped pulled-forward demand curve that is now inexorably collapsing, despite the protests of The Fed, Treasury and The Administration.

We will not return to a balanced economy capable of organic growth so long as this imbalance exists.  We are precisely emulating the idiotic and in fact criminally-insane stupidity that was practiced in Japan when their property bubble imploded.  Desperate to protect the politically-connected banking interests that had become entrenched as a result of structural decisions within the Japanese Central Banking system the Japanese government knelt before the banking interests and allowed them to sweep their bad debt under the carpet.

But that bad debt constrained lending and business activity, just as it has and is here.  This in turn prevented real economic expansion, just as it is here.  GDP growth was all government spending, but constrained in the ability to tax by weak consumption and pricing power, the government found itself on the business end of a debt ratio spiral – just as we are now here.

The root cause in both cases is the concept of “primary dealers” – favored banks that in our case are the “agents” of The Federal Reserve and who deal with The Fed and Treasury in the market for federal debt.

By creating these “Super Banks” the government and Fed have put the bank before the nation, and allowed themselves to be led around by the nose – literally. 

What other explanation is there for UBS, for example, retaining its banking charter after admitting that it helped Americans intentionally evade taxes?  For Goldman being able to securitize and sell debt – without civil or even criminal consequence as documented in my November 20th Ticker relating to certain “subprime” loans?  For Citibank being bailed out from bankruptcy at least three times (and maybe four?) in the last 20 years?

Let’s face reality folks – the “primary dealer” concept and implementation is nothing other than government capture.  It is a scam.  It is a device intended to profit a handful of ultra-large multinational firms at the direct expense of the American People – not just every day as they skim off their margin for “distributing” Treasury debt, but to an even larger degree whenever they decide to ignore the requirements of safe and sound lending and put the entire economy and indeed the government’s viability in jeopardy.

This piece of embedded corruption provides cover for criminal conduct (felony tax evasion by American taxpayers) and knowingly unsound lending, with these firms confident that the US Taxpayer will be obligated to bail them out should there be trouble.

But in this case the bailout has embedded structural trouble into the system, just as it did in Japan.  And let’s not kid ourselves – all we’ve done when it comes to housing is shift where the risk is.

Recent analysis has shown that the FHA’s “AUS TOTAL” decision-making program (computer-based underwriting) has been intentionally calibrated to produce unsustainable loans.  Indeed, as I have documented FHA will provide an “approve” return on DTIs (when one includes the FHA “fudge factors”) as high as 49% of gross income.  This is clearly an unaffordable loan and is reflected in the current FHA delinquency and foreclosure rate which stands, at this point at more than one in five loans.

The true ugliness here is that these stats are far worse than they first appear.  Why?  Because more than half of the FHA total loan portfolio has been originated in the last two years.

Consider what this default ratio means given the portfolio composition, as there are only two possibilities – either the FHA is intentionally making loans that are defaulting quickly, within the first 24 months, or the older FHA loans are defaulting at an astronomical rate.

FHA is less-than-forthcoming when it comes to testimony before Congress on this point, and apparently, Congress has buried its head in the sand as well.  Indeed, we have Congresspeople making statements that making dangerously-unsustainable loans is a “policy” intended to head off housing price declines.

But does and will it? 

Does giving someone a loan that will foreclose in a year or two actually head off housing declines?  Or does it simply bankrupt more Americans and defer the inevitable house price decline by a short period of time – a year or two at most, perhaps as little as a few months?

If the latter then this sort of institutionalized rape of our citizens, this time under explicit Congressional authorization as a matter of “policy”, is in fact nothing more than yet another scam to allow those “primary dealers” (and others) to unload their deeply-underwater and compromised MBS into the government – where they will then detonate, forcing the taxpayer to bear a loss that should have been taken by those who lent money without a reasonable expectation of being paid back on the original terms.