The Greatest Theft in American History
Ilargi
Most of us probably lose sight, from time to time, of the importance of the US housing market to the American banking system, the US economy and, for good measure, the entire global economy. Still, it's virtually impossible to overestimate that importance. So when a good reason presents itself to return to the topic, we are well advised to do so, and recent developments more than justify it. Much more than.
In the past, I have repeatedly talked about the perverse role the US government plays in the domestic housing market, through government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, which have total mortgage portfolio's of between $5 trillion and $6 trillion on their books, as well as an unknown amount and degree of "involvement" in mortgage-backed securities, and whose common and preferred equity were recently assessed as "worthless" by an analyst team at Keefe, Bruyette & Woods. Which of course only confirmed a poorly hidden secret.
The KBW analysts concluded that the only way to deal with Fannie and Freddie would be a bad bank construction. The government, however, as I’ve pointed out before, seems to be ahead of them. A rapidly growing share of mortgage loans are now processed through the Federal Housing Administration (FHA) and the Government National Mortgage Association (GNMA, a.k.a. Ginnie Mae).
Unlike Fannie and Freddie, these are full-blooded government-owned agencies. And that makes them even easier tools to manipulate the housing market. Ginnie Mae guarantees mortgage-backed securities backed by federally insured or guaranteed loans issued by the Federal Housing Administration. In other words, the government guarantees securities backed by loans issued by the government. These loans, however and of course, don't originate with the government.
Earlier this week, a story made the rounds of a 20-year old girl of Salvadorian origin who holds 3 jobs and bought a $155,000 home (and got a $34,000 "embellishment" extension on top of that) with an FHA-guaranteed loan with a 3.5% down payment. That story had subprime written all over it right from the start, and loudly begged the question what on earth moves the US government to move into (make that induce) subprime lending.
But that was just the first chapter of the tale. In chapter 2, we see that the damsel in distress didn't just see her loan guaranteed by the Obama administration. Crucially, she also qualifies for the $8000 tax credit for first time home-buyers.
Please pay attention. Now it gets interesting
$8000 may not seem like a lot compared to the $155,000 purchase price. But that's not the way to look at it. You see, the government allows those who qualify for the credit to use it towards their down payment. And now the picture changes dramatically.
Remember, our protagonist needed to put down only 3.5% of her loan. 3.5% of $155,000 is $5425. Hence, she still has $2575 left on her $8000 credit. So she adds $34,000, which brings the total loan to $189,000. 3.5% of that is $6615. So even with the embellishments, she still has $1385 left.
In the end, if we focus only on the government involvement in this particular situation, she actually gets paid to get a mortgage loan for her home. In effect, she gets a 105% loan. Of course, if we look beyond government involvement, the mortgage lender which "approved" her will slap an avalanche of fees and bills on her, and she's still sure to be made to pay and bleed through the teeth.
But the principle has been established. The US government has silently and secretly entered a situation in which its presence is even far more perverting than it was before, when its involvement was channeled through Fannie and Freddie. One aspect of this change pertains to mortgage insurance, which takes on an entirely different shape now that the government effectively guarantees all money involved. There is still an insurance premium, but it can be smeared out over the course of the loan, and nobody cares much about it with the full weight of Washington behind it to begin with.
This is just one side of the home-buyer tax credit that should be reason for concern
At 3.5% down, an $8000 tax credit potentially (and yes, I know this is a simplified version of reality) increases the amount a buyer can spend on a home by over $200,000. A sharp mind named Nemo at Self Evident says that this is bound to increase both the supply of homes on the market (since it allows buyers to spend -much- more, getting rid of -perceived- bottom prices) and the price per home. "Nemo" estimates the rise in prices could be as much as $100,000 per home. While we might discuss or even dispute that number, the principle is obvious and not disputable.
That principle is: the US government is busy actively raising home prices. And there we are back to what I've been saying about Fannie and Freddie for the longest time. While the reason given by Washington is that its involvement is driven by a desire to "stabilize" the markets, that is at best only part of the truth. What the White House and Capitol Hill are trying to do is "stabilizing" the markets at a level that they find acceptable. Which, if we recognize that their policies increase the number of homes on the market as well as their prices, evokes the image of a hamster on a flywheel. And that hamster WILL get tired at some point.
Who loses in this set-up? First, homebuyers, since they pay much more for their homes than if the government would stay out of the market. Then again, what obligations do the buyers really have? They get a home for free, more or less, and often with a non-recourse loan to boot. In the end, the by far biggest losers are the American taxpayers, who have to watch helplessly as their own chosen government shifts a fast increasing share of the losses of the housing market onto their tab, all solely for the benefit of the one and only party that stands to profit.
That is, the banks. Which can unload repossessed properties at much higher prices, given the tax credits. Which can keep properties and loans at greatly elevated prices on their books, which allows them to fool their shareholders and depositors into thinking they are far more healthy then they would be without government involvement. Who can use the artificially raised "values" on their books for highly leveraged financial wagers that if they pay off allow for multi-billion dollar bonuses, and if they don't can be channeled back to the taxpayers' account.
Why is this so important for the government? Why does Barney Frank proudly declare that the nation has a solemn commitment to those alleged "stable" housing prices?
Because without them, a huge chunk of America's 8000+ banks will be toast. More importantly, much of Tim Geithner's speed-dial list will be gone. He'll have no-one left to talk to before breakfast.
There are many of us who feel offended by the bank bail-outs and the bonuses paid with the bail-out money. But there is nothing that perverts America more than its government's housing policies. Take away Fannie, Freddie, Ginnie and the FHA, and you bankrupt the entire financial system with the stroke of a pen. The entire far too highly leveraged structure of loans, securities and derivatives in the end is based on the US housing market. That's why Obama and his people do what they do. Losing a million jobs a month is much less important than average home prices falling by $10,000 in that same month.
It's a lost battle, and they know it. But that means that they have nothing more to lose either, and they might as well transfer all the losses to you that they can get away with. Which is what is happening. While you discuss who does or does not stay on at reality TV shows, who gets vaccinated and who doesn't, who gets to fly a balloon and who stays at home, who should or should not be part of a health care system the government can't afford to implement anyway.
And I haven’t even touched on the home buyer tax credit fraud that lets infants, inmates and non-Americans cash in. Or the Nancy Pelosi proposal, sure to be voted in, that will extend the homebuyer tax credit to everybody who can fog a mirror, no questions asked, and make it $15,000 from the original $8000. Nor the fact that home sales have not, as claimed, increased by 9.4% in September, not even with all the credits in place.
There is no better and easier way to rob people blind then to make them think you're doing them a favor. Giving them an $8000 credit on a home priced at $250,000, that without that credit would cost them no more than $100,000, will be preferred over the cheaper home. Hey, it's free money. Isn't it?
The greatest theft in American history is not in the past. It's on ongoing operation. And it's run by your government.
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