The slow rolling collapse of the housing industry in this country -- which the Center for Economic and Policy Research estimates could wipe out $6 trillion in housing wealth in 2008 -- has gotten me to thinking about the future. Why do we even have mortgages? What would the housing industry look like without them? Is there a better way? My conclusion is that we should eliminate mortgages altogether. This will cause housing prices to drop, which will make it possible for more people to buy homes instead of living in houses that are really owned by the mortgage holders.

The reason we have mortgages is that the $10 trillion industry supporting them is powerful and self-sustaining. It fuels an enormous housing construction and furniture industry. And there are those in government who think home "ownership" is a worthy social goal. Unfortunately, when people take on a mortgage and then move into a house, the people who live there don't have its title -- the mortgage holder does. Simply put, home ownership is an illusion for most people -- the mortgage holder owns the house until the mortgage is paid off. Instead of renting from a landlord, the "homeowner" is living in a house that's owned by a mortgage holder.

With the rise of securitization, that mortgage holder is no longer the company that originated the loan. It's an investor who holds a mortgage-backed security (MBS) that contains your mortgage and thousands of others. It's an oft-repeated illusion that this is "home ownership." But that illusion is critical for keeping the mortgage industry alive. Unfortunately, if Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) fail, it will be us citizens who will be on the hook for the $1 trillion needed to bail them out.

We were given some more bad news this morning on the housing market, as RealtyTrac Inc. released data that showed a 53% jump in foreclosures during June compared with the same period last year.

The good news is that if you compare June foreclosures to the previous month, they actually declined 3% nationwide, but that gives little comfort to the 252,363 homes that received at least one foreclosure related notice in the mail last month. Perhaps you are thinking that does not really sound like too big a number considering how big America is? Well, on a per household basis, that number represents 1 out of every 501 homeowners getting a foreclosure notice.

Across the nation, banks seized more than 71,000 properties, and all but 11 states reported increases in their foreclosure rates. The usual suspects are still sitting at the top of the list, those being Nevada, California, Arizona, Florida and Michigan.

It is hard to find a money management firm which has been more successful than Blackrock (NYSE: BLK). The firm has a market cap of $25 billion and is known for consistently providing good returns for its clients.

Investors had better hope that the firm is not as prescient as it is skilled at making money. According to Reuters, "the money management firm is bracing for a 'much bigger' global economic slowdown." That means the pain will extend into next year. Blackrock puts most of the blame on continuing defaults in the mortgage markets.

Blackrock and other companies that have a great deal of money and skill will probably make hundreds of millions of dollars investing in distressed securities. The "haves" will increase the gulf between themselves and the "have nots."

Perhaps there is an ethical problem in making money off the misery of others. But, hey, it is Wall Street.

Douglas A. McIntyre is an editor at 247wallst.com.

Fed rate cuts help people who hold adjustable rate mortgages (ARMs) but they're less valuable to people seeking new mortgages.

That's because ARM rates reset periodically -- e.g., every year -- based on an index plus a lender's margin -- the amount a lender adds to the index, usually two percentage points or four percentage points, to set the actual interest rate of the ARM. The most common index for ARM adjustments is the one-year U.S. Treasury bill.

Last Friday, the one year treasury rate was at 1.88% -- down 3.04 percentage points below the 4.92% rate it was at in April 2007. The Fed's rate cutting has lowered the rates at the reset periods for those who already have adjustable rate mortgages. So a person who paid 2% plus the 1-year t-bill rate in April 2007 would have paid 6.92% during the last year and enjoyed a reset to 3.88% as of last week.

Monday, April 7

• PDUFA date for Bristol-Myers Squibb Co. (NYSE: BMY)'s supplemental Biologics License Application for Orencia for the treatment of Juvenile Rheumatoid Arthritis.
• Alcoa Inc. (NYSE: AA) to report Q1 earnings; conference call at 5pm.

Tuesday, April 8

• Chattem Inc. (NASDAQ: CHTT) to report Q1 earnings; conference call at 9:00am.
• FOMC to release minutes of the March 18th meeting at 2:00pm.
• Embraer-Empr Bras Aeronautica (ADR) (NYSE: ERJ) conference call to announce new midsize & midlight executive jet concepts at 6:00pm.

TheStreet.com's Jim Cramer says not all mortgage bonds are bad, and the ones with solid backing could be worth finding and buying.

Home price declines abound. Yet the mortgage bonds that are entwined with those homes are going up. So what's going on?

I think that what is happening is that the bonds themselves are not "as bad" as people think. There are several kinds of bonds out there that have to do with mortgages. Some of them are combinations of Home Equity Loans, and when you read that home prices have declined, many of these bonds could be worthless. But we are now becoming able to figure out that there are some homes that are not being walked away from, and if that paper can be found it might be a buy.

It's the latter that is trading and is taking the pressure off the Merrills (NYSE: MER) (Cramer's Take) and the Citigroups (NYSE: C) (Cramer's Take), and that's why you can hear Merrill say it doesn't need more capital. The inventory is rising in value or being sold at prices that are higher than we thought or that were marked.

Financial eras, like social periods, are often defined by moments or epiphanies when decision makers and/or citizens realized that a serious flaw/mistake/problem was occurring through time, and across space, and needed to be corrected.

The ever-incisive FT columnist and economist Martin Wolf describes one contemporary concern that's likely to be addressed: the failure to align the interests of managers with those of investors.

My BloggingStocks colleagues Peter Cohan and Zac Bissonnette have also written on the subject on several occasions in this space, and now the FT's Wolf has assembled additional data that may very well lead to public policy changes, both in Wolf's United Kingdom and in the United States.

MarketWatch has published a story that details the conundrum new first-time home buyers are facing in today's market. In "First-time home buyers struggle to find down-payment money," staff writer Amy Hoak tells about a middle-class family that bought a house a couple of years ago without having to put any money down. This same family, admittedly, would have trouble finding a loan today to finance their purchase.

Typically, when mortgage lending is restricted, it affects first-time owners the most because they frequently lack the funds for a down payment. According to the MarketWatch article, 45% of first-time home buyers opted for 100% financing between July 2006 and June 2007.

Experts are predicting that lenders are going to require more and more down before they're willing to lend to home buyers. To counteract stricter lending practices, check out loans backed by the Federal Housing Administration (FHA). According to MarketWatch, statistics confirm the recent popularity of these loans: The FHA backed 17,773 purchase loans in December 2006; that increased to 24,817 purchase loans in December 2007.

Down payments for these types of loans are around 3% and there are even down-payment-assistance programs to help to this end.

With market prices catering, buying a home in certain localities may prove a good move.

Zack Miller is the managing editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund.

Imagine if most of the homeowners whose mortgages are larger than their home values got a hand from the government. It may actually happen. According to The New York Times, "With the collapse of the housing boom, nearly 8.8 million homeowners, or 10.3 percent of the total, are underwater."

Helping these people out will almost certainly cost taxpayers money because the federal government will have to take on the risk of refinancing most of these mortgages. The FHA may expand its program to insure mortgages so homeowners can replace adjustable mortgages with lower fixed-rate plans. The government could also buy a huge number of delinquent mortgages and allow homeowners to replace them with ones that have lower monthly payments.

The Feds are damned it they do and damned if they don't. A full collapse of the housing market could cause a financial catastrophe and pull many financial institutions under. The government might have to support big banks with special lending from the Fed. That will cost taxpayers money as well.

If the government creates a true safety net to reduce foreclosures, it might not lose a lot of money at all. If home prices become more stable, defaults will fall and home prices should start to move back up. The Feds may have lost very little capital in the process because people will be able to handle their obligations and FHA insurance won't be needed to cover failed mortgages.

No one knows what will happen, so it is a crap-shoot either way.

Douglas A. McIntyre is an editor at 247wallst.com.

Government officials have a way of grandly stating what everyone else had known to be obvious for a long time. In this case, FBI director Robert Mueller called the epidemic of mortgage fraud that rose with the real estate bubble a "substantial problem."

The FBI is teaming up with the SEC to investigate 14 companies. According to the Associated Press, "As the nation's housing crisis worsens, there has been a dramatic spike in the number of mortgage fraud cases under investigation. An FBI spokesman said 1,210 such cases are open, up from roughly 800 a year ago."

The FBI has raised the number of its white-collar agents looking at mortgage fraud from 7% to 28% since 2003, and the case load has risen substantially as well. Back in December, Lita Epstein wrote about the soaring levels of mortgage fraud that are driving foreclosure numbers.

It's interesting to think about how much of a role mortgage fraud played in the housing bubble. Rampant lying on loan applications allowed people with shaky credit to buy houses they had no business buying. The effect was to flush tons of funny money into the housing market, causing a huge increase in home prices.

Bubbles and fraud seem to have gone together well throughout history, something I wrote about back in December. The effect of fraud is not just that it rips off the people who are defrauded; it creates a fundamental lack of balance in the market that leads to booms and busts.

Bank of America Corporation (NYSE: BAC) is rising today this morning on news that mortgage application volume rose 8.3% during the week ending January 18, according to the Mortgage Bankers Association's weekly application survey. The group cited lower interest rates as the major reason for the up-tick in mortgage applications. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on BAC.

After hitting a one-year high of $54.21 in February, the stock hit a one-year low of $35.13 on Friday. BAC opened this morning at $36.83. So far today the stock has hit a low of $36.60 and a high of $39.73. As of 11:50, BAC is trading at $38.86, up $1.47 (3.9%). The chart for BAC looks bearish and improving slightly, while S&P gives the stock a positive 4 Stars (out of 5) Buy rating.

Given the U.S. market's 400-point sell-off in its initial minutes of trading, "a Dow close down just 300-points would look like a moral victory" according to one economist.

"All things considered, from a market standpoint, a 300-point down day is a relatively small consequence," economist David H. Wang told BloggingStocks Tuesday.

Amid the sell-off, the U.S. Federal Reserve, in an emergency monetary policy action, cut key interest rates Tuesday morning - - cutting both the Fed Funds rate and the discount rate by 75 basis points. The Fed cut the Fed Funds rate to 3.50% and the discount rate to 4.00%.

Larger matter: mortgage insurers

Of utmost importance, in Wang's interpretation, is the health and fate of mortgage insurers, primarily MBIA (NYSE: MBI), and Ambac (NYSE: ABK), but also PMI Group (NYSE: PMI), and MGIC (NYSE: MTG).

Wang said the mortgage insurers "form a critical foundation in mortgage insurance, and as a result, in the mortgage process."

"A failure by MBIA or Ambac would mean several banks would not receive insurance payments for mortgages that go into default, substantially reducing the asset values of those banks," Wang said. "That would prompt another market sell off, possibly resulting in a failure by one or more banks."

Consumers are still willing to run their lives based on credit, so says an Associated Press report. Consumer borrowing increased at an annual rate of 7.4% in November compared to an increase of just 1% in October - ah yes, the faux magic of a consumerist Christmas.

The truth of the matter rests in the cause for the rise. Is it because consumers are still confident in their earning potential? The more likely cause is that consumers are running out of funding options, read that -- they're running out of cash.

So why is it that mortgages are getting harder to write but consumer purchases can still be funded with just a signature? Although they're deflating in value, homes still provide significant backing for lenders to lean their bets on whereas credit cards float in the unknown. With bankruptcies at an all time high, are we setting up for the final crash?

In its weekly report on the state of mortgage-application demand in the U.S., the Mortgage Bankers Association (MBA) said its purchase index dropped 8.5% to 360.8, while refinancing activity slid 15.4% lower to 1,620.9. The purchase index hasn't been this low since the week of October 10, 2003.

The group's index of overall mortgage-application activity declined for the third straight week, losing 11.6% to 533.9, hitting the lowest point since July 2006. These numbers were in the red even though borrowing costs have moved lower. Fixed 30-year mortgage rates averaged 6.05% in the latest reporting period, down 5 basis points to hit their lowest point since late November.

The MBA's smoothed-out four-week averages for its trio of indices also pulled lower. The overall market index lost 9%, the purchase index was down 5.9%, and the refinancing index was 11.8% lower on four-week moving average basis.

While most Asian markets were tumbling today amid anxiety over the assassination of Pakistani opposition leader Benazir Bhutto, Japan brings some additional worries regarding the outlook for the world's second-biggest economy .

According to the Japanese government, consumer prices saw their biggest rise in almost a decade because of higher energy costs, while industrial production lost ground. The Ministry of Internal Affairs and Communications also reported that the core consumer price index rose 0.4% in November, which was the biggest increase since a 1.8% increase in March 1998. The main culprits for the massive increase were energy prices, which jumped 5.4%, and gasoline prices, which climbed 10.8% over the year.

Despite the fact that the nation's jobless rate saw an unexpected decline of 3.8% in November, the Bank of Japan decided to keep interest rates unchanged. A rise in consumer prices was perceived by the Bank as a sign that the country was able to surpass the deflation that Japan had to fight with over the past few years.