Update: Jim Cramer must be in on this. The banks are withholding inventory and foreclosures will peak, but ONLY TEMPORARILY. The banks are manipulating the market to sucker more stupid investors into the market. Housing is not turning, and investors are flipping a lower inventory of foreclosures. That is the market. Also be wary of foreclosure fraud, by governments themselves who don't list foreclosure prices!

Update: Reported today is information that shows the percentage of people who have mortgages in the US currently behind in their payments. The percent is a whopping 12%! This is going to get worse because more alt a,option arms, and pay option arms will reset all the way through 2013!

This is a financial disaster waiting to happen. CNBC reported this as well as reporting that there is a 40, that's right, a 40 month supply of houses priced over the conforming limit of $417,000. Just remember that Jim Cramer said that housing will bottom in June, 2009. Remember those words and remember that I don't believe Cramer has a clue.

It is time to HUNKER DOWN.

While I agonize over people losing their homes, what needs to be understood is that the federal government of the United States created a vast, easy money, loose lending ponzi scheme that threatens to spiral into a severe recession or major deflation leading to a depression.

Now we need to understand that the banks should be saved and the auto companies should be saved if labor and management can reduce their own salaries. These jobs are too important. Actually because of the deflation that is occuring due to the credit crisis, all companies and governments should seek reduced wages rather than layoffs. Massive unemployment must be avoided.

So as you can see I am not adverse to government assistance where needed. And as I have pointed out in my article, If I Were A Bank, the banks are rightfully afraid to lend due to their understanding that house prices in bubble areas are still too expensive. I urge you to read that article carefully.

But, the help that should not be offered by the government is an attempt to stop foreclosures and put a floor under housing problems. The reason that this is a mistake is because house prices must come down. They are historically out of balance based upon wages and rents. Historically house prices have not exceeded three times yearly income. You can see that in bubble areas the prices far exceed the 3x rule and are still 5x and 6x yearly income! See also California Tax IOU for more on how this impacts state governments such as California.

The unintended consequence of stopping foreclosures is a freezing of the housing market. I repeat: the unintended consequence of limiting foreclosures on a massive scale will freeze the housing market and place a great gulf between the price the sellers wish to sell for and the price the buyers want to purchase the house for.

The factor that government does not realize is that we cannot go back to easy loans, easy credit, or artificial escalation of housing prices. Affordability must be restored. Making the economy more productive by controlling health care and by unwinding excess credit is something that the government can do. But living according to our means is essential. That ideal was unthinkable with Bush administration policy which allowed homeless people to buy multiple houses with no money down. What faith in the financial system or accurate appraisal of house values will that sort of behavior create? No faith in the system is the result.

Update: As you can see from the comment below, the banks are benefiting by the loan modifications. Help for borrowers is incidental as the big banks get the best deal as usual:

"Loan modifications are "a multi-hundred-billion dollar wealth transfer from pension funds and IRAs and 401(k)s to large banks," Frey says. "This is a backdoor bailout of the banks."Managing directors and principles at several multibillion-dollar money management firms privately expressed concerns about safe harbor during interviews in recent weeks. These investors insisted on anonymity in order to avoid being cast as advocates of foreclosures." http://www.forbes.com/2009/05/22/mortgages-foreclosures-business-wall-street-safe-harbor.html?partner=yahootix

Make no mistake, cars are still too expensive for Americans to purchase. At California Tax IOU, I have a little poll, and in that poll I ask if Americans could afford to purchase the cars they now own. 70 percent of the respondents say that they could not afford to repurchase the same car today!

While confidence in the financial system is very important, that alone is not the answer. Money can be available for loans, but people are facing an affordability problem that threatens our way of life! Demand for loans to purchase an inflated asset is just not there. People are wising up. They know that the no money down ponzi scheme was just that, a scheme that falsely manipulated the prices for housing upward. The unintended consequence of foreclosure mitigation could create the freezing of the housing market that will take years to solve. It is better to get the prices down to affordable levels now, and quickly. And autos need to be introduced into the United States that are simply less expensive! These are hard choices that the government of the United States needs to make. Just trying to put Humpty Dumpty back together again will not work and cannot work! We not only have a crisis of confidence, but the government doesn't get it that we have a crisis of AFFORDABILITY in many asset classes!