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Karl Denninger On Lessons To Be Learned

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Market Ticker

His entry Thursday, January 22. 2009 - Market Teaches Lesson #2

Near the bottom of a long list.

9. Housing prices are too high and need to come down. All attempts to "fix housing" without price corrections to historical norms have failed. Redefault rates for modified mortgages are upwards of 50%, proving that modifying existing loans is not the answer - foreclosure is, and that modifications are in fact just another exercise in "kicking the can." Sustainable home prices and mortgage practices show that home prices must correct to between 2.5-3x incomes on a median basis, and sustainable mortgages are 30 year fixed notes with 20% down and a maximum 36% DTI.

Lesson: "HOPE" and similar interferences with the housing market such as "DPA", low-down FHA loans and similar gimmicks are a fool's errand and will not resolve the problem. The solution is found in lower prices (and thus more affordable homes), not trying to prop up prices and sustain a popped bubble. Those who made foolish decisions to purchase or build beyond their ability to pay will inevitably default and this must not be interfered with, as that is how the market clears overcapacity and poor investment decisions.

Too late to check the American mortgage terminology... you'll get the gist.

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