John R. Talbott, a former Goldman Sachs banker, calls himself both an optimist and a realist. When it comes to U.S. housing, the realist has the upper hand.

His new book, “Contagion,” predicts that prices are only halfway through a potential decline that will see homeowners lose up to $10 trillion. Values will fall for four to five more years, he says, as defaults move from subprime to prime mortgages.

When I reviewed the book last week, some readers called the author courageous. Others accused him of being a doomsayer. I put their questions to Talbott, 54, in a telephone interview.....

The economic crisis has opened up opportunities for apartment tenants. The inventory of vacant apartments is expanding, and rents are dropping quickly in major metros across the country.

For renters with leases about to expire, it's time to negotiate. Landlords are working extra hard these days to keep units filled.

Of course, your ability to hold on to an apartment—especially a luxury unit—depends on how secure you feel about your own job. Americans lost about 2.6 million jobs in 2008 (mostly in the final quarter of the year) and are likely to lose millions more this year. They are losing money on stocks and other investments and are cutting back on costs by downsizing and moving in with family members or roommates as they hunker down for a deep recession.

U.S. President Barack Obama couldn’t have picked a better place to talk about economic triage than Fort Myers, Florida.

“I know Fort Myers had the highest foreclosure rate in the nation last year,” Obama said at a town hall meeting last week.

“So we are going to do everything we can to help responsible homeowners here in Fort Myers and other hard-hit communities stay in their homes.”

What Obama failed to mention is exactly how he plans to stop foreclosures and pay for the government program to heal the housing and credit markets. The cure may be worse than the disease and trigger soaring inflation once the government starts printing money to pay for everything.

Leverage got us into this crisis. Is it logical to assume that massive borrowing will get us out of it without damage?

The record 81 percent increase in foreclosure filings last year -- affecting more than 2 million people -- needs a government solution. Some of the initial relief will come in the latest incarnation of TARP, part two of the Troubled Asset Relief Program outlined by Treasury Secretary Timothy Geithner the same day as Obama was speaking in Florida.

Although specifics are lacking, “son of TARP” proposes to aid the mortgage market and stem foreclosures.....

The Obama Administration wants banks to offer loans with easier terms to more than 2 million borrowers in danger of defaulting on their mortgages, twice as many as 2008. That won’t stem the foreclosure crisis if prices keep falling.

A third of owners will walk away when the value of their homes drops 20 percent or more below what they owe, even if they can afford the payments, a situation known as “rational default,” said Norm Miller, director of real estate programs at the University of San Diego School of Business Administration.

Obama has committed at least $50 billion in guarantees for lenders that negotiate new mortgage terms, and proposes putting taxpayer funds at risk for half of $444 billion of loans that would be modified this year. Fifty-eight percent of the modifications made during the first quarter of 2008 ended up back in default, according to the U.S. Treasury’s Office of the Comptroller of the Currency. Unless lenders cut principal owed to reflect the current market value of properties, the same thing may happen this year, Miller said.....

The following is a reformatted version of questions and answers on the Obama administration’s housing plan released today by the U.S. Treasury in Washington.

Questions and Answers for Borrowers about the Homeowner Affordability and Stability Plan

Borrowers Who Are Current on Their Mortgage Are Asking:

In the high school gymnasium of an Arizona community hard-hit by the housing crisis, U.S. President Barack Obama unveiled his latest rescue scheme for the economic crisis: an ambitious $75-billion (U.S.) plan to stem foreclosures that aims to keep as many as nine million households from losing their homes.

But the painful reality for the U.S. president is that the housing crisis, like the banking crisis and the recession, continues to worsen after stubbornly defying all previous government interventions.

Mr. Obama's housing plan may keep millions in their homes, but is unlikely to help the housing market stabilize, analysts warned yesterday. Housing prices are still falling in virtually every major U.S. market, plunging millions of indebted Americans into a black hole, where they owe more on their mortgages than their homes are worth. Each notch down in prices produces more foreclosures, and a new wave of toxic debt for the besieged banking industry.

“This bailout is likely to simply delay a day of reckoning for the banks, at great cost to taxpayers and little obvious benefit to homeowners,” warned Dean Baker, co-director of the Center for Economic and Policy Research in Washington.....

The president's new mortgage-relief plan contains clever elements that might indeed help homeowners. However, the superfluous threat of inviting judges to rewrite contracts must dilute the collateral behind troubled mortgage-backed securities. That, in turn, would jeopardize the endangered capital of banks, pension funds and other holders of such securities, including the Federal Reserve, Fannie Mae and Freddie Mac.

The simplest yet arguably most potent part of the strategy is the plan to allow Fannie and Freddie to refinance conforming loans (up to $729,750) without the quaint requirement that the refinanced loan be no larger than 80% of the value of the house. This change provides access to today's low mortgage rates even to "underwater" borrowers -- those who owe more that their houses are worth. Although such borrowers have no skin in the game, President Obama assumes or hopes that their reduced payments will result in fewer defaults.

A second part of the plan provides standardized rules for modifying mortgages (obligatory for banks that accepted Troubled Asset Relief Program money). Participating lenders would first have to cut interest rates sufficiently to limit mortgage payments to 38% of gross income -- something more likely for those now paying 39%-40% than for those paying much more. The government would then match further interest-rate reductions to push mortgage payments all the way down to 31% of pretax income. In order to cut mortgage payments to 31% from 38%, $75 billion in taxpayer subsidies will be available to lenders to cover half the cost. Some will pay more in taxes so that others can pay less for housing. This is redistribution based on debt rather than income.

The plan also provides small bribes to mortgage servicers and borrowers for every assisted borrower who does not end up defaulting again (a big problem with past loan modification schemes). Treasury would also establish an insurance fund to protect participating lenders if house prices fell further.

Subsidizing select mortgages poses a fundamental rationing problem: Demand for subsidies rises to meet the available supply. If Joe and Sally get federal subsidies to cut their mortgage payments to 31% of their income, their neighbors will want subsidies too. To keep the expenses from ballooning well beyond $75 billion, there may have to be stern but arbitrary "means testing" to decide who is most deserving of a taxpayer-supported mortgage. And that will likely provoke resentment about how winners and losers are picked.

The third part of the plan is to get Fannie and Freddie to buy more mortgages with the hope of keeping mortgage rates down. Never mind that both organizations were considered insolvent last fall, when they held far fewer dubious IOUs than they do now. The plan instructs the Treasury -- which is also getting skeptical reviews from Moody's -- to invest another $200 billion in Fannie and Freddie preferred shares.

Last and least helpful, the president's proposed "cramdown" would "allow judicial modification of home mortgages for borrowers who have run out of options." That would require federal legislation, and Congress would be well advised to put that plan aside in order to give the president's new options a fair chance.

Any plan that compels mortgage holders to reduce the amount of money they are owed must in turn reduce the value of mortgage-backed securities held by banks, insurance companies, pension funds, Fannie and Freddie, and the Fed. By injuring the balance sheets of potential lenders, a cramdown would also injure potential borrowers.

The needless threat of inviting judges to rewrite mortgage contracts at whim helps explain why bank stocks generally fell on the plan's announcement, while financial shorts rose.

In sum, allowing conforming loans to be refinanced without a big equity position seems promising. Trying to bribe lenders to trim monthly mortgage bills to 31% of income would help those lucky enough to get in on the deal before the money runs out. But all of this potential good could be undone by the systemic risks to mortgage-backed securities caused by the unpredictable legal risks of a judicial cramdown.

the government would then match further interest-rate reductions to push mortgage payments all the way down to 31% of pretax income. In order to cut mortgage payments to 31% from 38%, $75 billion in taxpayer subsidies will be available to lenders to cover half the cost.

The effect of the Obama administration’s housing plan on home-loan bonds and borrowers will be limited by restrictions on which mortgages are eligible, according to Bank of America Corp. analysts.

The plan, announced yesterday, includes government payments to lenders such as bond investors, as well as to mortgage servicers and borrowers either before or after loans are reworked. It also will loosen Fannie Mae and Freddie Mac rules to allow more borrowers to refinance into lower payments, including some who owe more than their homes are worth.

Only about 50 percent to 60 percent of securitized prime jumbo or Alt-A loans meet the loan-modification standards requiring borrowers to live in mortgaged properties and owe no more than Fannie and Freddie’s loan limits, according to a report yesterday by Bank of America strategists including Akiva Dickstein and Vipul Jain. The refinancing plan will be limited by a standard preventing homeowners from qualifying if they owe more than 105 percent of their homes’ value, they said.

“Borrowers who do not qualify due to loan size can of course still have their loans modified by their servicers, but without the government incentives,” the New York-based analysts wrote. The refinancing plan “does little to help underwater borrowers,” they added.....

Jumbo Loan Defaults Rise at Fast Pace as Rich Suffer

By Bob Ivry

Feb. 20 (Bloomberg) -- Luxury homeowners are falling behind on mortgage payments at the fastest pace in more than 15 years, a sign the U.S. financial crisis that began with the poorest Americans has reached the wealthiest.

About 2.57 percent of prime borrowers who took out jumbo loans last year were at least 60 days delinquent, according to LPS Applied Analytics, a mortgage data service in Jacksonville, Florida. They got to that level within 10 months, almost twice as quickly as 2007 borrowers and the fastest rate since at least 1992, when LPS Applied Analytics began tracking the market.