There has been a lot of discussion lately in the business press about who should be bailed out in the housing bust.

The Fed is bailing out investment banks (ala Bear Stearns.) But many analysts believe it won’t be enough and that the government will have to actively intervene in the housing market. There are several choices for the intervention, including these:

1. The government can mandate that banks simply write off the excess mortgages. Basically, if you bought a house two years ago for $700,000 but now it’s “worth” $500,000, the bank would write off the $200,000- so the homeowner isn’t on the hook for the larger amount.

2. The government could buy out mortgages directly. Some aspects of this plan have the government “loaning” 10% of the house’s “value” to the homeowner so that they have equity in the house. The loan will be low interest and must be paid back- over time, of course.

Not sure what each of these will do to “save” the housing market. If you don’t allow prices to come down, then it cannot correct. Housing prices are simply unaffordable compared to incomes.

How many of you are paying more than 30% of your income towards housing costs?

Me too. I’m raising my hand.

That is historically abnormal. Imagine making $80,000 a year and buying a home for $160,000. That used to be the norm in most parts of the United States. Until it gets back to “normal ratios” in most parts of the country, the housing bust won’t be over.

The question is increasingly turning to: who should get bailed out?

Obviously, the investor buying five houses or condos shouldn’t be bailed out. But if that investor goes into foreclosure, doesn’t that foreclosure bring down home prices in that neighborhood or building all the same as a foreclosure by a non-investor? Of course it does.

And what about foreclosures on upper income homeowners. It isn’t just the subprimes which are going down. Increasingly, I’m seeing foreclosures on million dollar homes.

Take this house in Glencoe, Illinois, an extremely upscale suburb north of Chicago. Million dollar homes are the norm in Glencoe. The median household income is $164,000.

It’s a new construction home that was sold in February 2006 for $1.89 million. It has been on the rental market for $6,000 a month.

It’s a 4 bedroom, 4.5 bath home.

It recently went into foreclosure for $1,778,574.

Should this homeowner be offered help from the government?

It will be interesting going forward. The cries for a full-fledged bailout are growing as the number of foreclosures rises to records in some parts of the country.

The moral hazard is great. But the risk of doing nothing could be greater.

Hillary Clinton is running on a political platform that says she wants to freeze all foreclosures for six months or longer. Some people laugh at the idea. But is it all that farfetched?

During the Great Depression, some states froze mortgages for up to 3 months- mainly to keep people calm.

And now a tipster has told me that the government is actually studying the feasibility of freezing foreclosures for as long as three years.

Yes- imagine it.

All of those investors getting to live in their overpriced condos for three years for relatively pennies on the dollar. Risk-free.

I don’t know any real details yet though. Maybe the government will someone exclude investment properties from the plan. So far, it’s just being “studied” as an option.

But even still- is freezing foreclosures for years a good idea? What do the banks do in the meantime? Who pays the taxes, assessments and who would keep up the home if they thought they would lose it in a year, or two, or three anyway?

Questions, questions.

Congressman Barney Frank (D) from Massachusetts will put up a new bailout plan today. Only a few details have emerged. From the New York Times:

Like other proposals floated by banks and regulators, Mr. Frank’s plan would have mortgage companies write down the value of loans to their current market price before they are refinanced and given F.H.A. backing. Participation would be voluntary, however.

Mr. Frank did not mention the prospect of the federal government’s purchasing home loans outright, according to a report by the Stanford Group, a research firm. Mr. Frank and his staff have considered loan purchases in the past, but the Bush administration opposes such an arrangement.

There have been rumors the past few days that Frank’s plan would offer up to $10 billion for the government to buy up foreclosures. Here is some of what has been circulating. From The Hill:

Senate Banking Committee Chairman Chris Dodd (D-Conn.) and House Financial Services panel Chairman Barney Frank (D-Mass.) would allow the government to purchase billions of dollars’ worth of mortgages at a discount — but only after lenders have agreed to write down their costs to reflect the loans’ true value. Under Frank’s plan, the loans would be refinanced for a subset of troubled borrowers and then resold to investors.

Writing in an op-ed that ran in The Washington Post on Sunday, Frank said that some might interpret his approach as “ ‘bailing out’ people who made mistakes.” But Frank said many of those people were “victims of unfair lending practices.”

Unfair lending practices? What happened to the moral hazard argument?

A bailout would help some of those preyed upon- no doubt. But it would certainly help many others who were caught up in the greed of the housing boom.

Why should I, as a fiscally responsible taxpayer, bail any of the investors out? Or those who bought too much house on their salaries?

It seems that many of these plans are going to put an enormous strain on government entities such as the FHA, which aren’t capable of handling this much debt.

Yes, the number of foreclosures is escalating. But it will hurt the system more to mess with it- then it will to simply let it work its way through the system. The downturn will last longer if the government gets involved to try and soften the blow or somehow blunt the pain.

Stay tuned.

I’ve talked a lot about the economic side to foreclosures but sometimes we forget that for many people, the house wasn’t just an investment, it was their home.

Foreclosures have been happening for decades, so it’s not a recent phenomena. But no matter how it happens, it can be devastating to some families.

This is from the Chicago Tribune, written by a Tribune photographer named Heather Stone:

I was 16 years old, living in Owensboro, Ky., on a street called Greenacre Drive, when the American Dream died for me.

We were losing the home I had grown up in.

The house, a modern split-level with 2.5 baths on about 2 acres of land, was being sold due to foreclosure. The auction price: less than $75,000, about half its true value.

The cost to me and my family, meanwhile, was immeasurable. We had to move out in a week.

I think of this now amid all the news of families losing their homes.

Her father was in the early stages of dementia. Her mother had a side retail business that was for “fun” and was in no way able to support the family. It was the early 1980s, and her mother was of an era when women didn’t really “work.”

My mother had strong attachments to her house as well. She had designed some of its architecture. She had lived there for 25 years. Leaving was such a painful upheaval of emotions.

Not to mention clutter. That was almost indescribable. I just remember a mound of memories sitting in the yard, a 10-foot-tall heap of things we did not know what to do with.

How could we fit 25 years of a house into the apartment we were headed for?

She describes throwing away cherished momentos of their family in the rush to move (as her mother was emotionally unable to do most things that needed to be done to get the family out of the house.)

All of this is certainly painful to read. A change in a family’s financial circumstances are especially hard on the children.

In the current wave of foreclosures, the foreclosures have been cause by a mixture of free credit, Americans who rolled the dice and bet on continuing appreciation, and then the usual suspects of divorce, job loss, illness and death.

On the other side of the country, in the San Francisco suburbs, sheriffs are given the grim task of following through on evictions from homes. It is these policemen, and not the banks, that see the human result of the free and easy credit.

From the San Francisco Chronicle:

People get plenty of warning during the foreclosure process, which takes from six to 12 months. Then they get a “notice to vacate” from the sheriff at least six days before the eviction date.

“There are a few who are holdouts,” Custodio said. “I try to be as courteous as possible; allow them to gather a few things, a toothbrush.”

Still, the deputies draw their guns before entering a seemingly vacant residence.

“We have some where they tell you they’re not going anywhere,” Odom said. “You talk and reason with them. Most people, when they get the understanding that their other option is to be arrested and go to jail” agree to leave voluntarily.

A whole crew assembles for evictions. There are the two deputies in a patrol car - they take a “cage unit” car in case they have to arrest someone for refusing to vacate. At each property, they are met by the owner or a representative. When it’s a foreclosure, that generally means a Realtor or property manager hired by the bank. Often, the owner also arranges for a locksmith to be there to rekey the property or to gain entry if necessary.

The deputies will not kick in a door. “It is not the sheriff’s office policy to destroy property, unless it’s an exigent circumstance,” Custodio said.

Odom, who has been on eviction patrol for just a few months after nine years as a county patrol officer, had already witnessed a particularly dramatic incident with a foreclosed homeowner.

“We had one where we thought nobody was there,” he said. “The locksmith was working on changing the locks. Then a guy came to the screen door - he had slit his wrists and had blood running down both arms. He said let him alone to die in peace.”

After calling for police backup, Odom was able to persuade the man to get in an ambulance to go to the hospital. His injuries turned out not to be serious.

In the 1930s, one of the reasons many state governors put a 90-day moratorium on foreclosures was because the sheriffs were getting shot at when they went to do the evictions (usually by upset farmers.)

We could easily see that again. These sheriffs have a dangerous job.

Your home is your castle and it has many emotional ties for people.

In this “new era” of investors walking away from condos and investment homes or some buyers who have only lived in their homes for 2 years and who have little equity- we forget about the others, who for whatever reason, have gotten into financial trouble and now can’t get out.

These are their stories.

And there will be many more, unfortunately, to come- before the system is purged of the excesses.

While there will be a lot of pain associated with the bursting of the housing bubble for many people, I also believe there will be something positive as well.

Remember when buying a house was a possibility for many people? Remember when it was actually affordable?

I was reminded of that when I read this excellent NY Times article called “A Refugee From Gangland.”

In it, Margaret B. Jones discusses how her life had changed since she grew up in the gangs of South Central L.A. and had moved to Eugene, Oregon.

“Shoot, I’m happy,” said Ms. Jones, 33, a single mother who spent her youth as a foster child and gang member. She was dealing drugs on the streets of South Central Los Angeles before she hit puberty. “I’m making do. At least I’m not in three rooms anymore.”

Instead, she owns a four-bedroom 1940s bungalow near her alma mater — a university where she “learned big words for stuff I already knew,” she said — and has just written a book, “Love and Consequences” (Riverhead Books), a heart-wrenching memoir that was released this week.

She actually bought the house before she ever got the book contract. Here it is:

After she graduated from college and had a daughter, she then worked at Starbucks. You wouldn’t think working at Starbucks would give you much money in which to buy a house, right?

In 2000, while working at a Starbucks, Ms. Jones bought her four-bedroom house in the Whiteaker neighborhood, considered the ghetto of Eugene, she said. “But it’s the nicest place I’ve ever lived. This little ’hood is safe. Schools are great. The neighbor kids come over to play, Mexican and white. I feel cool — I walk my dogs at two in the morning down to the river.”

I had to think back to 2000 and what was going on in the housing market then. Some areas were already heating up, specifically California during the dot-com boom. But apparently Eugene was pretty quiet. At least in the “non-desirable” neighborhoods.

“It was different for me because I’m up here where you can buy a house for $130,000, with a 3 percent down payment.” She came up with her down payment by cashing in Starbucks stock options, she said.

Remember when houses cost $130,000- even if they were in the “ghetto”?

A house in South Central today, even with the declines, is well over $300,000 (and probably well over $400,000.)

Houses in West Oakland, not considered the safest area of Oakland by any means, were selling for over $400,000 just a year ago.

This young woman worked at a coffee shop, got some stock options (because Starbucks actually DOES reward its employees with both stock options AND health insurance if you work more than 20 hours a week) and then bought a house.

When will be seeing that again?

It will happen. The market will return to the mean.

I was just struck by how she bought her house and what it means to her now.

It’ll be kinda nice when we get back to those simpler times, don’t you think? Then we can all work “normal” jobs and still have the American Dream.