New column: How's the Dodd-Frank housing bill? Compared to what?

Okay, I don't get it. You say that the problem now is not ARMs readjusting upwards, but rather the home value have declined. As long as someone remains current on their mortgage and have no intention of moving, this shouldn't come into play at all. If it does, then it seems to me that three possible conclusions apply:

1. Job losses and to a lesser extent gas and food prices are preventing homeowners from remaining current. That's probably a factor, though it's not clear it's a big one.

2. Some homeowners are still addicted to HELOCs and similar methods of extracting equity from their homes to spend, and cannot free themselves from that addiction. This could be peripherally related to #1 above.

3. There was widespread fraud in the home lending process, and these homeowners could never have afforded the homes they bought. I wonder if this is by far the biggest cause.

Are there any other conclusions you can think of?

Curmudgeon,
I believe that real problem is that home prices rose to levels which were unsustainable. These home prices were the valued assets which backed many backs portfolios and showed certain liquidity levels (loan to value ratios and such). So, now, we have a financial system which is exposed to huge deflationary pressures while the oil and commodities market is inflating to counter falling dollar values (really a lack of confidence in future US GDP) and increasing ratios of supply to demand. This is the real problem. Frank's housing proposal given those facts mean that the legislation is just a band-aid on an arterial wound.

Justin,
jump in if I am off target anywhere.

@Curmudgeon: It's that people who are underwater on their mortgages are much more likely to default and be foreclosured upon than people who aren't. If you're having trouble making your payments but you still have positive equity, you can sell or take out a second loan to avoid foreclosure. If you're underwater, neither of those options is really available to you. This Boston Fed study, published in May, found that declining house prices may be the biggest single factor in generating foreclosures. What started it all was that lots of people got mortgages they couldn't ever hope to pay back unless house prices kept rising, but I think now we're reaching the point where even people with less-dodgy mortgages are running into trouble because of declining prices. The vast majority of people who are underwater on their mortgages will probably keep making their payments, but the foreclosure rate will still keep rising until house prices stop falling. (Or is it that house prices will keep falling until the foreclosure rate stops rising?)

@Bryan from Houston: Yeah, basically, although I think the oil and commodities inflation is only partly caused by the weak dollar, which means a U.S. slowdown could eventually have the effect of bringing those prices down--which ought to stanch the bleeding at least a little.

Thanks, Justin. And it can sometimes be difficult to tell the difference between cause and effect .