Mortgages for the 'Middle-Rich' Are Class Warfare Ammunition
For weeks now I've been telling you the markets are broken.
Now I'm going to prove it.
Today I'm talking about the housing market. It's broken. The truth is Congress broke it. Of course, it had help from mortgage originators, banks, and a deliriously greedy public.
But now, amidst all the rhetoric about class warfare, wouldn't you know it, some congressmen want to further grease the wheels of an already slippery housing market for a class of homebuyers I call the "middle-rich."
It's just plain stupid. And not only will it add to our housing woes, it's ammunition for middle-class Americans, who rightly recognize they are the biggest losers in a class warfare battle they never imagined would undermine the American dream.
A Good Idea Gone Terribly Wrong
What's being debated in Congress is the maximum size of mortgages that Fannie Mae and Freddie Mac can guarantee.
The previous maximum mortgage eligible to be backed by the Government Sponsored Entities (GSEs) was $625,000. In the aftermath of the credit crisis and housing bust lobbyists easily got that maximum raised to $729,750.
The increased limit expired on September 30, 2011. But the usual lobbying forces – in this case that would be banks, mortgage originators, realtors, home builders and financial intermediaries that trade mortgage pools guaranteed by taxpayers – are pushing to extend the higher limit until at least the end of 2013.
It doesn't make sense for the government, or taxpayers, to guarantee mortgages at all. The whole scheme, which originated in the Great Depression and made good sense at that time, should have been phased out decades ago. Instead, it mushroomed.
The idea is simple enough. In order to drive money towards housing finance, the government establishes "conforming" criteria for mortgages. When mortgages conform they are believed to be of a certain standard and quality and can be packaged into mortgage-backed pools. The government guarantees the payment of principal and interest on those pools. Investors buy the pools because they are guaranteed, and the money they pay banks and originators for the mortgages in the pools goes back to originators and banks, which now have more money to make more loans to more homebuyers.
Taken at face value this isn't a bad idea. But as is so often the case with even the best ideas, there are unintended consequences. In the case of the government guaranteeing mortgages, there are plenty of very negative unintended consequences, like "moral hazard," for example.
That's why, after the horror of the Great Depression had passed, government guarantee programs should have been phased out, so that private markets could freely price the risk of originating and holding mortgages.
Unfortunately, that didn't happen. That's why we find ourselves in the situation we do today.
Money Morning's Shah Gilani Responds to Reader Comments on His Housing Plan
Dear Money Morning readers:
To every one of you (and there were more than just a few!) who took the time to comment on my housing-fix plan, thank you. I read every single comment, twice.
Money Morning readers have always impressed me with their insights and activism. That's why I write for Money Morning, I get to have a "conversation" with you, which motivates me, enlightens me and always keeps me looking at every side of all the issues I write about.
Here are some of my thoughts on your comments:
First of all, it's not possible for any comprehensive address of a problem as deep and wide as what our housing market is facing to be perfect. There is no such thing as a simple solution to such a complex set of attendant issues. And, no matter how exhaustively researched and designed a packaged solution is constructed, there will always be unintended consequences and naysayers who would rather complain about the status quo than change it.
Employment Numbers Not Good News For Housing
(West Palm Beach) A clear and direct relationship has existed between employment and house prices in the US over the past 9 years. In order for housing prices to turn up, a necessary condition would be a sustained upturn in total employment. Although the widely reported seasonally adjusted employment data seems to indicate that such [...]
Money Morning Mailbag: Mortgage Rates Slip But U.S. Housing Market Still Unfriendly for Some Seeking Refinancing
U.S. mortgage rates dropped to a record low this week as the U.S. Federal Reserve started its second round of quantitative easing (QE2).
The 30-year fixed loan rate fell to 4.17% from 4.24%, Freddie Mac (OTC: FMCC) said yesterday (Thursday). The average 15-year rate fell to 3.57% from 3.63%.
Lower rates pushed up refinancing applications by 6%, according to the Mortgage Bankers Association's Weekly Mortgage Applications Survey for the week ending Nov. 5. The refinancing gauge has more than doubled since the beginning of 2010.
With Kickbacks on Force Placed Insurance, the U.S. Mortgagegate Scandal Just Gets Deeper
I thought that I'd seen it all with the "Mortgagegate" scandal, but the story that American Banker broke yesterday (Wednesday) underscores why the U.S. housing market has been host to the biggest and most-profitable scam the world has ever seen.
According to the article, the newest development in the American mortgage saga has to do with "force-placed" insurance policies: When mortgage borrowers don't pay their homeowner insurance premiums, are in default or in the foreclosure pipeline, mortgage-pool servicers make sure homeowner properties remain insured by requiring the purchase of a force placed insurance policy.
That makes sense. After all, the collateral that underlies the mortgage has to be protected from damage or total loss.
As it turns out, force-placed insurance policies are aptly named.
The American Banker article disclosed that the force placed policies that servicers are making homeowners buy can cost as much as 10 times more than standard policies. And servicers are making homeowners buy policies from preferred vendors.
In return for delivering these new insurance customers, mortgage-pool servicers are getting commissions – "reinsurance fees," in insurance-industry parlance, reinsurance fees.
I call these "fees" what they really are – kickbacks.
Question of the Week: Mortgagegate Makes Investors Wary of U.S. Banking Industry
A potentially crippling crisis is flashing through the banking industry and threatening to derail the already struggling housing market and U.S. economic recovery.
But Gilani said the headlines aren't telling the full story.
Dubbed "Mortgagegate" – a nod to the earlier scandal-ridden crisis touched off by Watergate – this latest crisis involves such big lenders as Bank of America Corp. (NYSE: BAC), Citigroup Inc. (NYSE: C) and GMAC LLC (NYSE: GMA), which are alleged to have conducted negligent foreclosure practices.
Money Morning Contributing Editor Shah Gilani warned about the allegedly fraudulent business practices employed by lenders and their hired "robo-signers" that led to thousands of questionably reviewed foreclosure documents.
What You Don't Know about "Mortgagegate" Could Crush the U.S. Banking System
What most Americans don't know about " Mortgagegate" is that "robo-signing" of foreclosure documents is the tip of the iceberg.
The breadth and depth of this newest mortgage crisis is so dangerous that the U.S. Federal Reserve last month pre-announced another potential round of quantitative easing (pundits are calling it "QE2") to address "potential negative shocks."
In fact, the fallout potential is so numbing and the actions that birthed it so scandalous that commentators have given the crisis the Watergate-esque title of " Mortgagegate" (or, as some prefer, "Mortgage Gate").
Here's what the news-story headlines aren't telling you.
A Helpless Housing Market Keeps Fannie and Freddie in Limbo
Mortgage-industry industry leaders will attend a summit with government officials today (Tuesday) to discuss how to reform Fannie Mae (NYSE: FNMA) and Freddie Mac (OTC: FMCC), the two mortgage giants that so far have devoured close to $150 billion in taxpayer bailout funds.
However, that meeting is likely to be derailed by a far greater problem: After making modest progress, the housing market again appears on the verge of collapse.
"There's been a feeling in government, which seems to be more pervasive than it was six months ago, that says, 'We've solved this housing problem; let's move on to Fannie and Freddie,'" Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP in New York told The Wall Street Journal. "But you haven't solved this housing problem. We have another round of home prices going down a little more."
Cost to Fix Fannie Mae and Freddie Mac May Reach $1 Trillion
The cost to fix Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), the government-backed mortgage companies that bought or guaranteed three-quarters of all U.S. home loans last year, could run as high as $1 trillion, according to a report by Bloomberg News released yesterday (Tuesday).
The minimum amount required to keep them afloat will be $160 billion, or $15 billion more than they have already drawn from an unlimited line of government credit granted to keep the home mortgage market functioning. That exceeds the amount already spent on bailouts for American International Group Inc. (NYSE: AIG), General Motors Co. or Citigroup Inc. (NYSE: C).
"It is the mother of all bailouts," Edward Pinto, a former chief credit officer at Fannie Mae, who is now a consultant to the mortgage-finance industry told Bloomberg.
Fannie and Freddie own or guarantee 53% of the nation's $10.7 trillion in residential mortgages, according to a June 10 Federal Reserve report. Their books are loaded with millions of bad loans, and delinquencies are on the rise.