Here's Another Genius Mortgage Idea From Washington That Is Going to Cost You

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Now here's another good idea from the geniuses that ruin, I mean run, our country.

The Obamarama administration really wants to help homeowners whose homes aren't worth what they borrowed to buy them. In other words, they are "underwater."

A lot of the loans to homeowners that are underwater are owned outright or, at a minimum, insured (more often both) by Fannie Mae and Freddie Mac, the government-sponsored (which means taxpayer saddled) enterprises that the government had to take over when in 2008 they lost on their trillion-dollar bets that home prices would go up forever. Geniuses!

In fact, these geniuses own or insure close to half of all home loans in the United States. Obviously, they like to bet big. But they didn't bet alone. They had betting partners.

The casino was the whole country and the whole system.

The mortgage originators, prime and subprime lenders, banks – everyone was handing out loans because, get this, they wouldn't be responsible for the loans they were making. Fannie and Freddie were buying them all up while the guilty parties would make money as Fannie and Freddie pipelined more products to – guess what – make more loans!

In case you forgot, that's where all the money came from in the whirling dervish derby that fed the mortgage bubble and aided and abetted Alan Greenspan's how-low-can-you-go interest rate policies. I guess we can call him the Big Pit Boss. But I digress…

So, if Fannie and Freddie own your loan and you're underwater, they have been cattle-prodded by the geniuses above them (yep, government geniuses) to let you refinance at a lower rate (lower than the crushing, sucker's rate that ballooned on you).

Because, as an investor (that's what home buying really is – an investment, not a right) you made a go-for-broke bet at the table and forgot your basic math. Math that says, "One, plus the none that I have, equals three, so this is a good bet I can double down on and retire."

What will these geniuses think of next?

Banks won't let you borrow more from them – you'd end up actually paying them less on your underwater house. That would be stupid of them, and we all know banks aren't stupid.

But, apparently, that's OK for Fannie and Freddie to do. Why?

You're just going to love this logic…

Because they aren't taking the additional risk. They're already insolvent government wards. See, it's the taxpayers who are taking on the additional risk, helping underwater borrowers reduce their payments by letting them refinance.

Why is that good government policy? Because if they have more shekels in their pockets, these underwater folks are going to spend it and send that money back into the economy. That's the theory. You see, that's how they got into this mess in the first place. Genius.

But I digress, again.

Obama and company now want to help the underwater borrowers whose loans aren't owned or insured by Fannie and Freddie.

According to their genius plan, they want F&F to buy and insure refinanced loans from the folks whose mortgages they don't already own. Why? Because when the government geniuses asked banks to do this on their own, they heard the reply loud and clear: "Go F&F yourselves."

Obama and company tried this back in February, when they suggested that the Federal Housing Administration take on more underwater loans so refinanced folks could have more spending money. But that didn't happen. Someone pointed out that there was a newspaper article that the government must have missed that hinted that the FHA was about to need its own bailout. And wouldn't you know it, they just about do.

Maybe it's me, but if the geniuses at F&F have been saddled with so much junk that they're wheezing along on life support, and if there's talk – although nothing ever happens – that they should be unwound and buried, why would anyone suggest that they take on even more underwater loans and receive even less interest for the additional risk? Geniuses, right?

Look, it's not that I have a problem helping people. I'm all for it. But I'm not for helping investors who take risks and then can't handle the heat in the kitchen when the oven door flies open. I'm not for saddling taxpayers with higher risk loans so the folks who are underwater can get more spending money to help the economy – as if that's a good plan in the first place.

If we want to help underwater homeowners, or folks saddled with high-interest mortgages, there's a smarter, more humane way to do it.

We bailed out the banks that got us all into this mess. So why not make all of them offer refinancing to any homeowners who've been regularly paying their mortgage? These homeowners deserve some credit for doing the right thing, for dealing with a bad investment like good investors do.

And make the banks offer super low interest loans and keep the loans on their own books.

Yes, I said MAKE them. And that's exactly what I mean.

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Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Short-Side Fortunes, Shah shows the "little guy" how to make massive size gains – sometimes in a single day – by flipping large asset classes like stocks, bonds, commodities, ETFs and more. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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  1. Dan | December 31, 2012

    Shaw,
    Typically I agree with most of what you say but I think you are missing the point of refinancing these loans. It is not just the "investor"/homeowner who is not keeping up with their mortgage payment that loses when the banks refuse to work with them on a legitamite refi or modification. Everyone loses when the property is taken back in foreclosure instead. From the homeowner to the neighbors to the HOA's to the local governments to the investors holding the paper or are insuring it. I have seen so many times where because of a change in income a person who was able to make their payments when they bought the house are no longer able to handle them but they could handle them if they were just lowered to the now current interest rates that are being given to current buyers but they can't get the bank to modify or refinance. So instead the house goes on the market as a short sale and sells for much less than what is owed bringing down the values of the houses around it or even worse the bank doesn't accept the short sale and the house goes into foreclosure and sells for 30% less as an REO! If that loan had been modified or refinanced that house would have never been on the market dragging down the property values around it.
    What really concerns me is that with the hyperinflation that we are heading towards it seems to me that those investors who used to be holding paper in the form of private mortgages are no longer in the game of holding paper making F&F the only game in town. Why are they not in the game any more? Is it because they know that we are heading toward hyperinflation and don't want to have their money tied into long term paper that is going to have a net loss? So now instead they are out buying up the real assets in bulk so instead of paper they will have a real asset that will be a hedge against inflation. Which in my mind makes this whole thing just one big land grab by the super wealthy from the average american home owner! Should our tax dollars be used to help prevent this type of land grab? Hell yes!!!

    • Gerald Filardi | January 6, 2013

      What you haven't said is that maybe the people who bought the house were living large and not preparing for a rainy day! I can afford a house that costs a million dollars, but I would never obligate myself to that extravagance. Rather I would and did buy a house that was well within my ability to afford it in good times and bad times. Not everyone needs to own a house and everyone who buys a house needs to understand the risks of ownership (neighborhood decline, taxes, insurance, maintenance, etc.) Don't blame the banks and rich people for this catastrophe, rather, blame the Federal government and legislators like Barney Frank and William Dodd as well as President Bush and Clinton for espousing home ownership as a right without an obligation to fulfill the terms of the contract of ownership. You sir, might very well be a socialist in disguise!!!

  2. dourdan | December 31, 2012

    I say deflation

  3. Andy Schuck | December 31, 2012

    The only problem is surrounding homeowners are also investors…..you take a chance when buying a home and it is usually the biggest investment that 90% of Americans make.

    As an investor the value of your home will rise AND fall and so if there is a foreclosure on your block or someone lets their property get run down….YOU WILL FEEL THE REPURCUSSIONS….but I would NEVER expect the US TAXPAYERS to foot the bill if this were to happen to ME!!!

  4. skip | January 1, 2013

    capitalism will never survive if the system isn't allowed to work. bad,underperforming businesses and mismanaged companies who take huge risks and fail must be made to liquidate and declare bankrupcy. when we BAIL OUT the losers don't we deny smaller better managed companies their "fair shot" to get their "fair share"? we were told "we had to SAVE the auto industry", don't they still have the same pension problems? we were told "we had to bail out the banks", any other option would have brought society to it"s knees. we were also told the fiscal cliff will disable us, the end of the mayan calander will doom us, y2k, well they weren't really sure what that would do, only it would be bad. point is we never really know for sure. how long do we go on believing them?

  5. Jill | January 1, 2013

    We can't make the banks do anything. That would be socialism. We have capitalism– which apparently means that the banks control our government & everything else, that we bail them out & they run off without giving us anything in return. They probably gamble away the bailout funds & then request to be bailed out again. Privatize profits; socialize losses. That's supposed to be capitalism today– although it certainly has changed over the years.

  6. John | January 2, 2013

    Deflation is not going to be allowed by the big boys who actually run the country (hint: these people are un-elected.) The central bankers will print infinite amounts of money to keep deflation from happening, since deflation disproportionately harms bankers with vast assets instead of the little guy. (How many tons of gold do you control?) This will crush the working class, who will see hyperinflation eat their savings and wages, assuming they still have a job. Jobs will be decimated as businesses cut costs to survive, contracting the economy further. This is a powerful negative feedback loop.

    The 0.1% who have lots of investments in hard assets will ride out the inflation just fine, and even make a profit on it.

    There is still a huge glut of real estate that has not been foreclosed on yet. Banks would be crazy to foreclose, since it would force them to change their books to reflect the current true market value of their real estate, causing bank failures. There is also the thorny issue of who actually owns the mortgages. But when any large bank fails, they will have to liquidate their real estate holdings. The housing market goes kaboom at that point.

    On top of the whole thing is the quadrillion dollar elephant in the room, the unregulated derivatives market that is waiting to take down the western banking system as soon as any large bank fails, or even if Greece defaults (which triggers the payment of unpayably large sums between too big to fail banks.) Thus the "haircuts" for Greek government bondholders instead of uttering the word "default". When Portugal, Spain, Italy, or France gets to the same point, who will be willing to take the haircuts then?

    The situation is like Wile E. Coyote, standing in the explosives shed packed with TNT and open gunpowder kegs, about to light a match to see how to get out. Congress is running a crane that's dropping tons more explosives (debt and toxic assets) on the shed. Many ignition points exist, any one of which will cause a rapid cascade failure of the system.

    "Yipe."

    And now Obama is hot to take away firearms from citizens so they become subjects instead. Could the reason for this push be any plainer? Ordinary people will be pissed off when they can't find or afford a loaf of bread anymore. Better start outlawing pitchforks and boards with nails in them.

  7. John | January 2, 2013

    Bankers have already gambled away more funds than all the governments of the world could afford to bail out (derivatives market over 1000 trillion dollars and counting.)

    Governments at all levels are in the hole beyond the point of return (debt/GDP >> 1). The downward spiral is accelerating exponentially.

    Would the last person out the door please turn off the lights?

  8. Jim | January 6, 2013

    I agree with the article 100%. For a complete understanding of the present world global financial system and the parlous state it's been brought to one should read "The Creature from Jekyll Island" – a second look at the Federal Reserve – by G. Edward Griffin ISBN no. 0-912986-18-2.
    This book deals with global finance historically prior to the US Fed's formation in 1913 and then chronicles its actual formation and the results which are now being seen in stark relief.
    President Woodrow Wilson said when he had signed the Fed into law "my God, what have I done".

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