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[Editor's Note: Shah Gilani, a retired hedge fund manager and noted expert on the global credit crisis, predicted this developing FHA debacle in a July 2008 Money Morning essay.]
Is the government creating another subprime-mortgage bubble?
The first time around, the three-headed federal serpent – the Bush administration, the Treasury Department and the U.S. Federal Reserve – used Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) to "legitimize" trillions of dollars worth of toxic financial waste known as subprime mortgages.
The result was the worst financial crisis since the Great Depression – a mess that was global in nature.
And we're now headed for a repeat performance.
Some of the players may have changed since the first subprime-mortgage crisis, but the game apparently remains the same. With banks currently unwilling to lend, the new federal triumvirate of the Obama administration, the Treasury and the Fed are trying to inflate the moribund U.S. housing market. This time around, however, the FHA is the weapon of choice.
Obama & Co. are making an all-or-nothing bet that the U.S. economy will recover and bail out the housing market before the final bill for this ill-advised gambit comes due.
When this bubble bursts – and it will – U.S. taxpayers will be on the hook for more than $1 trillion in government-guaranteed debt.
Ginnie Mae: Fannie and Freddie's Once-Quiet Cousin
As a direct result of the real-estate meltdown, U.S. banks have become reluctant lenders. And they've raised their loan standards considerably. Federal officials knew they had to keep the mortgage spigot open, especially to suspect borrowers, so they turned to their new "secret weapon" – the FHA.
The FHA has been cranking out new government-insured subprime loans, which it packages into government guaranteed securities for sale to banks. This frightening reflation of the subprime bubble is being engineered for two key reasons:
- To put a floor under falling house prices.
- And to let banks swap toxic Fannie and Freddie securities for new toxic debt that is 100% guaranteed by U.S. taxpayers.
The almost inevitable insolvency of the FHA could rapidly undermine the fragile recovery of the U.S. economy. And it could plunge stock prices and bank viability to new lows.
Why the FHA?
That's simple. In an era of increasingly stringent lending standards, the FHA's standards are laughably lax.
Created by the National Housing Act of 1934, the FHA insures private mortgage lenders against borrower default on residential real estate loans. But its current allure is that it opens the door to prospective homebuyers who almost certainly wouldn't qualify for a conventional home mortgage. These are buyers with no credit history, a history of credit problems, or not enough cash to cover the down payment and closing costs.
The FHA has quadrupled its insurance guarantees on mortgages in just the last three years, with the bulk of that growth coming in the past two years. Currently, the FHA insures $560 billion of mortgages.
Loans that are FHA-insured are pooled and packaged into mortgage-backed securities (MBS) by the Government National Mortgage Association, more commonly known as Ginnie Mae. Ginnie Mae insures the actual MBS pools composed of FHA loans. Ginnie Mae securities are the only mortgage-backed securities backed by the full faith and credit of the U.S. government.
Two weeks ago, Ginnie Mae proudly announced that it had issued a monthly record $43 billion in FHA mortgage-backed securities, and through the end of July held guaranteed securities with a value of $680 billion. It is on track to exceed $1 trillion worth of guaranteed securities by the end of calendar year 2010.
Ginnie Mae is a cousin of its better-known siblings Fannie Mae and Freddie Mac. Those two mortgage giants are technically insolvent, and were forced into government conservatorship at the height of the financial crisis – ostensibly due to concerns that foreign central banks in China, Japan, Europe, the Middle East and Russia might stop buying our bonds. As "government-sponsored enterprises," or GSEs, Fannie and Freddie were only supposed to have the "implicit" backing of the U.S. government. But recent events have shown these to be fully backed by taxpayers.
The implosion of Fannie and Freddie severely threatened the mortgage market. It essentially shut down the two giant repositories that bought the loans banks and mortgage originators didn't want to hold as assets on their own balance sheets.
The FHA and its mortgage-backed securities "factory" – Ginnie Mae – have taken up where Fannie and Freddie left off, and are now the dumping ground for toxic mortgages. Using the FHA is the core strategy in the administration's misguided effort to prop up mortgage origination and modifications, real estate prices and insolvent banks.
Warning Signals?
Administration officials might want to take heed of some eerie parallels between the current situation and the one involving Fannie and Freddie. They could serve as an early warning system.
First and foremost, the FHA has already started to acknowledge systemic fraud in its business. In the earlier subprime crisis, similar circumstances led to the revelation of massive fraud in the issuance, packaging, ratings and sale of subprime toxic mortgage-backed securities.
On Aug. 4, the FHA suspended Taylor, Bean & Whitaker Mortgage Corp., one of its largest approved independent mortgage originators, from making anymore FHA-backed loans. The suspension came one day after federal investigators raided Taylor Bean's Ocala, Fla., headquarters.
Since 2007, the value of FHA-backed loan originations underwritten by Taylor, Bean had soared 117%. By contrast, the origination of conventional loans by the firm dropped 34% over the same period. Taylor, Bean subsequently filed for bankruptcy.
Earlier this summer, the U.S. Department of Housing and Urban Development (HUD), which oversees the FHA, raised concerns about FHA practices. On June 18, HUD released an internal inspector general's report that revealed that the FHA's default rate exceeded 7% and that more than 13% of its insured loans were delinquent by more than 30 days.
In a "Review and Outlook" piece, The Wall Street Journal reported that the FHA's reserve fund dropped from 6.4% in 2007 to about 3% today, putting it dangerously close to its mandated 2% minimum. That translates to a "33-to-one leverage ratio, which is into Bear Stearns territory," the newspaper report stated, referring to the now-failed investment bank that had been a central player in the original subprime mortgage crisis.
Bear Stearns is now owned by JPMorgan Chase & Co. (NYSE: JPM).
The HUD inspector general's report stated that the agency's growth makes it "vulnerable to exploitation by fraud schemes" and that it may need "Congressional appropriation intervention."
In a recent article – "FHA Disputes Whispers of Capital Reserve Problems" – on the Mortgage News Daily Web site, HUD Secretary Shaun Donovan said in June that "there's a better than even chance that we will stay above the two percent reserve threshold. That suggests, not just for the 2010 business, but overall for the portfolio, that we'll more than likely to stay out of a broader need for any taxpayer funding."
It may be more than a little disheartening to know that in a very uncertain economic environment, precisely due to fraud in mortgage lending and increasing borrower defaults, that our government is stretching a 50/50 wager on the backs of taxpayers.
That's only part I of the FHA dilemma story.
Part II is even more frightening.
A Look Ahead
Banks are dumping Fannie and Freddie-backed securities onto the Fed's balance sheet and replacing them on their own balance sheets with FHA-insured loans packaged into government-insured securities issued by Ginnie Mae. Banks aren't reducing their net assets, they are aggressively swapping acknowledged toxic securities that no-one wants for a new variety that no one will want in the future. Why?
It's not just that Ginnie Maes are fully backed by the U.S. taxpayers and Fannie and Freddie's securities are only implicitly backed. All of them will be covered by taxpayers.
The devil is in the details.
Because Fannie and Freddie securities are only implicitly guaranteed, banks that hold these securities as assets on their balance sheets must "haircut," or set aside reserves, based on a 20% risk-weighting assigned to the value of those holdings.
Because Ginnie Maes are explicitly 100% guaranteed, they are considered "risk free," and on par with U.S. Treasury bonds, notes and bills. There is no reserve requirement, or haircut, on Ginnie Mae securities.
By replacing their asset mix and holding Ginnie Maes, banks don't have to set aside reserves. They can use the money they otherwise would have to set aside to actually leverage-up their balance sheets. And guess what they're buying?
More Ginnie Maes, naturally.
The effect of the asset swap – basically one toxic pool for a replacement that's not much better – creates the illusion that banks have healthier balance sheets and that they are meeting their reserve requirements. It's such a good deal for the banks and actively promoted by the Fed and Treasury, that banks are using Troubled Assets Relief Program (TARP) money to buy Ginnie Maes.
But it's all a façade.
Capital ratios are being manipulated and insolvent banks are being propped up.
The danger of relying on the FHA to prop up the shaky housing market by facilitating mortgage origination, modifications and refinancing to less-than-stellar borrowers will only result in more subprime loans being stockpiled on the Federal Reserve balance sheet.
Eventually, defaults will overwhelm the FHA. And the hoped-for floor in residential real estate pricing will be pulled out from under us all. The next down-round in real-estate values will expose bank balance sheets for what they really are: Over-leveraged and over-stuffed with junk. Already on the ropes, banks will lose capital and will have to tighten the credit screws on consumer borrowers even more.
We may be headed for another bruising round of real-estate and MBS-related depreciation. Even a mild financial-markets setback could put the economy and the stock market onto the canvas for a 10-count. Further pummelling of shaky consumer confidence accompanied by a couple of major bank failures could easily send the U.S. market down for the financial-system equivalent of a TKO.
Taxpayers, always the lowly cornermen holding the spit buckets, are already in place with the safety nets. We will catch the FHA loans because we insure private lenders against subprime borrowers with no skin in the game. We then will have to catch the buyers of Ginnie Maes, because we guarantee those MBS securities. And we will be forced to catch the falling banks, because we already insure depositors through the Federal Deposit Insurance Corp. (FDIC).
Perhaps our ultimate fate is that of the permanently punchdrunk veteran boxer, who rues his decision to stay in the game, realizing that he fought "one bout too many." If that's the case, that "one bout too many" could be Subprime Crisis II, arranged by the very market referees whose job it was to protect us from such beatings.
News and Related Story Links:
- Money Morning Investigative Report on the Bank Bailouts (Part I):
Foreign Bondholders – and not the U.S. Mortgage Market – Drove the Fannie/Freddie Bailout. - Wikipedia:
Subprime Mortgage Crisis. - Associated Content:
National Housing Act of 1934. - SEC.gov:
Mortgage-Backed Securities. - About.com:
What is a Ginnie Mae Security? - InvestorWords.com:
What is Full Faith and Credit? - InternationalForecaster.com:
Great Doubts for the Benefit of the Stimulus Package. - Wikipedia:
U.S. Department of Housing and Urban Development. - Investopedia:
Government-Sponsored Enterprise. - The Wall Street Journal:
Taylor Bean Suspended From Making FHA Loans. - The Orlando Sentinel:
Ocala-based Taylor, Bean & Whitaker Mortgage files for Chapter 11. - Wikipedia:
Bear Stearns Cos. - Mortgage Daily News:
FHA Disputes Whispers of Capital Reserve Problems. - Money Morning News Analysis:
Inside Wall Street: That Ticking Sound You Hear Out in the Mortgage Market is the FHA.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of 10X Trader, Shah presents his legion of subscribers with the chance to earn ten times their money on trade after trade.
Shah is also the proud founding editor of The Money Zone, where after eight years of development and 11 years of backtesting he has found the edge over stocks, giving his members the opportunity to rake in potential double, triple, or even quadruple-digit profits weekly with just a few quick steps.
Shah is a frequent guest on CNBC, Forbes, and Marketwatch, and you can catch him every week on Fox Business's "Varney & Co."
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.
FHA and GNMA aren't the devil — executive compensation and reliance on foreign workers are! Where's the story about the real cause of mortgage defaults? When people don't have jobs, they cannot pay mortgages. Get it?
ross perot said what 'hold on to your wallets folks i hear that great sucking sound from the south" he was talking about free trade and what that meant!!! JOBS!!!
I remember the personal attacks on Ross Perot-an honest very savy businessman and philanthropist( large gifts to MDAnderson Hospital among others)-the investment bankers and crew who profit from M and A, overseas fees, et all savaged him-he was trying to tell the less sophistocated American worker that they are being sold out and they were. Someone should find his graphs and review them-he was right and the scum who sold our country out are now buying our elections with the profits.
Mr Gilani's article is excellent-thanks
How can people without enough-paying jobs, or without any jobs at all, buy houses and get mortgages in the first place?
They don't get them and they weren't before.
This "sub-prime" claim is a fiction, a red herring. A recent studyconcluded that nearly all of the "sub-prime" / high interest rate loans, should have been low interest / "prime mortgages" but the consumers were funneled into them without a choice. People were not given the choice of a fixed 20-year 4% loan, and a 30 year 3% fixed rate loan. Nor were they ever sold a variable rate loan with a low starting "teaser" rate. To the contrary, home buyers were given moderate rates and told that they would go down when interest rates went down, and that the following year they would at not cost get a refinance at a lower rate when the value of the home went up. Many people were "forced into the market" as their rental properties were being converted to condos and sold, or their rents were being driven up by local market conditions, and tax increases.
You are very close, and the hit is a direct one, as the target is aligned,as you see it.
CLEARLY . . . .
I wouldn't say for sure that all the sub-primes are a fiction, but you're right on when you say many consumers were funneled into those loans without the opportunity for an informed choice.
FHA is putting people in houses with minimal down and no savings. If the hot water goes out they can't even afford to replace it. Subprime I was about putting everyone in a house. Subprime II is about putting as many people in houses to manufacture a floor under the housing market and protect the banks. Whatever happened to 20% down to qualify for a mortgage?
What a bunch of BS. To begin with, the loans being made today (what few there are), are nowhere near the same as the "toxic" loans of the past. To call these current FHA backed loans "toxic" is ludicrous.
The days of the Option ARMS, Interest Only, No Doc, 125% LTV etc. loans are gone. Todays borrowers have to meet income requirements, credit score limits, make at least a 3.5% down payment and, in some cases, submit DNA samples and sacrifice their first born. Not to mention the appraisals are being scrutinized beyond belief and reason.
I agree, there will be defaults, but nothing near what we have seen in the past. Get real.
This guy has always been a Grim Reaper in the past, after all he's a hedge funds guy. The more fear out there, the more money he makes.
hOW LITTLE YOU KNOW, I SEE THIS HAPPENING EVERY MONTH, I SEE PEOPLE GET THESE LOANS, S TILL, THEY ARE BEING OFFERED AND THEY ARE BEING WRITTEN UP
It is evident that the rating agnecy are at the forefront of this problem. It must be the buyers of the MBS that should be paying for the rating and not the sellers. Untill the rating agency are regulated, this will continue to be a problem. The lax underwriting and risk taking will contuniue throughout this industry, which will cause a mortgage crisis similar to the one we just had.
In 2006 we had Obama and some 20 other lawyers from Acorn going to banks that were not making bad loans and threatening large lawsuits if they did not make bad loans, as specified under the 1994 Federal Fair Housing Act signed into law by Clinton, and sponsored by Barney Frank and Chris Dodd. This law was the means for destruction. I think you will also see many defaults on Auto loans from the glunker program. Many people bought that would not have otherwise.
What you say about the role of the Democratic "dream child" (government forced subsidized housing) is fact and has been repeated in some circles in the media. My comment is that I am struck by how little traction or acceptance this bombshell of information has garnered. Call it bias, denial, political protectionism, lying, stupidity or rationalization; it is death to us all to not be able to see reality clearly. The explanation for this gross "unseeing" remains a mystery.
There is a reason that it is not getting any traction because it is not true.
There have always been defaults on mortgages. But there have been no "no documentation loans" that is total fiction. My girlfriend bought a condo in 2005, the very height of the market, but she had no choice. It took over 5 months of running back and forth to banks, the FHA, and several mortgage brokers, nearly every day. She had an income of nearly $50,000 working 2 jobs, excellent credit, and the condo was $125,000, it was the 3rd one she looked at, because of the endless demands for documentation, and the banks wouldn't loan her less than $125,000 she wasn't able to close on the first 2. She was not one of those ficticious minimum wage workers buying a half million dollar palacial estate in the Hamptons that the news media keeps claiming. But she was funneled into a "sub-prime" varaible interest loan with the promise that when rates go down so would the mortgage rate. One year later the rates went down, and her mortgage went fron 7.25% to the maximum allowed under contract of 12.25% her payment went from about $900 / month to almost $1500 per month. We have been desperately paying down the principle and have gotton the occassional, rate reduction, and have not missed or even been late on a payment. But the rate increase did severe economic damage to our plans. Most of the home buyers were in the same boat. You couldn't get a fixed rate loan between 2004 and 2006. Banks used any excuse they could find to push varaible rate and interest only loans. The higher the rate the higher the commission.
The reason for the mortgage meltdown was 2 fold. The oil price spike caused a severe economic slowdown, and developers overbuilt expensive properties in economicly weak areas. [the luxury condo craze in Las Vegas for example, "rust belt" revival crreated by the SUV craze] – loss of short term growth that was clearly not sustainable, and the massive government spending increases of the Bush administration.
Government has always been obsessed with maximizing "growth rates" and forgets that every "ghost town" was once a "boom town". When the economy slows down to try and get back to where it should be, government steps in to "stimulate" it. And there in lies the real problem.
What do you expect for shacking up. Get married and half your problems will go away.
the author of this article starts out making a huge mistage as to who started this sub-prime loan mess ….It was Jimmy Carter and followed up by Bill clinton……check your facts…….we do!!!
I am wondering what role, exactly, Shah Gilani believes Fannie and Freddie played in the subprime situation. Fannie and Freddie are not and were not subprime entities. They are 'prime' entities. This whole article is pretty ignorant though. To suppose that our financial crisis is the result of the subprime meltown is like supposing the cough causes the cold.
Further, FHA standards, though lower than Fannie and Freddie are nothing like subprime standards, if one can even use that word for subprime. FHA has increased its down payment requirements and tightened its credit requirements since 2007. FHA has also increased their insurance premiums substantially since 2007 in order to support their mission of being self-sustaining.
I don't disagree with Gilani's belief that we will see another huge wave of foreclosures, but Gilani's focus on the symptom versus the cause and ignorance about how residential lending actually works leads me to suggest Mr. Gilani write about something else.
Dear Mr. Gilani,
If you research, you will find the sub-prime mortgage crisis began under the Clinton administration. Fannie Mae announced in 1999 that it was lowering requirements for mortgages for those with lower incomes. You can find the article by going to the link below.
http://www.nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgage-lending.html
Your article is misleading, and like so many others blames the Bush administration for the mortgage crisis that began under the Democratic administration of Bill Clinton.
Sincerely,
Thomas DeClue
That is correct, but I do believe it was underway before Bill. He just endorsed it. It actually goes way back, same as the Fereral Reserve. The people are really to blame for not paying attention to what has been going on everywhere. When Bill was govenor of Arkansas he was using the Mensa (sp) airstrip for Cocaine deliveries, not just for personal use. Back to the people! We have got to quit being Demorcrats and Republicans, since we all gotta live here. We are all in this country together and United We Stand/Divided we fall. I have always looked and researched for who was running and have been happy with the choices since I was able to vote. It does not matter if your a Democrat of Republican. Folks have to vote for who is better for the country, even if they are Indepentent, even if they are one of the two party system. People are afraid and don't want to rock the Political Boat so to speak by actually thinking for themselves. Instead they go with the herd mentality. Most people don't know anything about politics, Since it doesn't seem to matter as both parties have the same agenda! We need to start thinking for ourselves and get educated. It does not seem to matter who we vote for as whoever the elitists want in office will be there. To bad you folks didn't rise up when W did not win both elections. He didn't ya know but nobody had the ball's to speak up. I did. Where the rest of the American Public. Watching TV or whatever. It's almost to late. Get rid of the Czars, Congress etc. Wake Up People. Yeah You who kept telling people like me I'm imaging things. Time to WAKE UP!!!!! Mind Control seems to work quite well.
Hello world;
kela is more correct on this than most of the people wha are posting. It goes farther back than just "Slick Willie". If you study history you will see that the "New Deal" lkwas handled the same way and had the same results. All of our "politicians" are rrepeating history because they deither have not studied it or have not learned from it.
I would strongly recomend that each of us look to ourselves to save ourselves as the "fools" will rely on the government. It was the government that got us into it by circumventing the Constitution and they are trying to have us believe that they are fixing it by circumventing the Constitution. It is time to take back the country from the politicians.,
The problem is not that people "don't study history". The authors of the history books have a political bias to tell only their side. If their policies failed, they write a book claiming it was a success. People then study the false history and make the same mistakes. Remember "He who controls the past controls the future."
After all how many of you learned from history that Columbus wanted to prove the world was round not flat; or that he called the people he discovered "Indians" because he thought he was in India?
Propably 90% of you. But both things are absolute fictions.
Never in Western History did people think the earth was flat. The ancient Greeks assumed it was a perfect sphere and built statues of Atlas holding up sherical shape earths. This was established philiosophical fact. So ingrained was the idea that 10th century monks calculated the circumfrence of the earth (correct to with 1000 miles of what we now know) and in the 12th century got it to within 100 miles.
Columbus called the people Indians because he thought he got to the "Indies" a term then used for all the island chains off the cost of China all the way to India. (including Japan – where he thought he had landed, the Philipenes, Indonesia, etc)
They did not call themselves Japanese, but Arawaks, so he figured he wasn't on the main Island of Japan. On future voyages he explored the whole coast of Nicaragua, but didnt make landfall because he didn't see the cities and ports of China that he knew should be there. But never once did he ever think he was in India.
People don't make the same mistakes because they "didn't learn", they make the same mistakes because they "did learn" what they "were taught" which was wrong.
Bush did the same mistakes as Hoover, because he was under the mistaken understanding that Hoover did nothing. Instead he wanted to do "something" so that he wouldn't be Hoover.. So what did he do? The same mistakes that Hoover made. And the Democrats response is that "Bush did nothing just like Hoover".
If voting actually changed thing it would be against the law.
BINGO! Kelela
The saddest part of this story is that all the self seeking on the part of those who have the fiscal ability to prosper from this situation is that we as a country are witnessing the economic takeover of our country's resources and our economic position in the world. It is the same effect as if we went to war and lost and are now a conquered nation, without having fired a shot! The shame of it all is that many are within our own ranks that helped this situation to come about to this sad estate. During war, we hold people who are traitors accountable with their very lives. Today, we have allowed those responsible to go essentially unscathed and my children will pay through taxes and loss of prosperity for what I consider to be very insidious rape of our country!
In some part – fair play, what goes around comes around, it's just so unfortunate that it is so true, this sense of betrayal from within. The ' untouchable ' corporate and govt. scoundrals taking, taking, scheming, taking with no regard or sense of responsibility to the country as a whole.
Every now and then you read an article about a corporate scandal in China where a ' scoundral ' is held accountable either by his own hand, or, a Govt. bullet. That can't be the right way, but, this isn't either.
I would note that the Fannie and Freddie woes didn't start during President Bush the 2nd's time but during the Clinton years. Though I agree he failed to do something about it. Him and Congress.
The Mortgage problems continue today according to this Reuters article http://www.reuters.com/article/ousivMolt/idUSTRE58K29E20090921
And I would suggest that they are going to increase to an even higher rate because of the unemployment rates that continue to rise across the country. Remember the "good news" that the gov keeps feeding is us that less people were laid off, not that more people were hired. So the job loss is increasing not decreasing.
Add to all this a dollar that continues to bleed and inflation is not far behind as gold – an inflationary leading indicator – shows us.
Consider too how banks are leveraged. Check out this article on the FHLB which is leveraged close to 25 to 1. http://www.caseyresearch.com/displayCdd.php?id=227
As the government is also so leveraged just wait until they tell everyone to turn in their gold at the closing bell rate(yes guys like me will keep ours but about 75% is held by five major companies or funds that send you a certificate they will comply).e you t You will be given this fed fiat money and "Dick" will look at "Jane" and say honey look we doubled our investment on gold let's spend our profit and by that new truck from Government Motors and new drapes and furniture, thus starting the artificial stimulation and the rampant inflation. Our if you want to hold on to it they will give you treasuries instead.
No surprise here. Almost everything the government does is to set the taxpayer up for another fiasco. It has been doing just that for almost 100 years. Why would it change it's spots of deceit and nation destruction now? Wake-up Americans.
'1994 Federal Fair Housing Act signed into law by Clinton, and sponsored by Barney Frank and Chris Dodd' was the shot in the head to the housing market, one of the moving parts in the housing crash, not to consider the sep 11 terrorist attack that sent the us economy into a short recession making the FED to put interest rates lower, so there was a lot of factors coming into play in the 'perfect storm'.
Hate to break it to you common sense and BEM but FHA has had massive fraud throughout its history. Maybe its a good example of how easy it is to perpitrate fraud on Gov't agencys. September 2008 unemployment was 6.2% at the time. Massive layoffs etc. started happening once the market tanked so how can you possibly make an argument that it was a lack of jobs that caused the 1st crash. Even though FHA is a full income check loan (unless its a rate & term refi) their credit standards are far below conventional standards. All in all I believe the writers case has potential to come true!
Without doubt, the efforts to prevent fraud on gov't (taxpayer) backed FHA loans should be of first priority. But to suggest that FHA loans may lead to the next big sub-prime melt down might be going to far. As a commentor noted, these aren't 125%, negative amortization, no documentation loans (this loan actually existed at one point). The primary reason that FHA loans have increase so dramaticly is that FHA loans require a much smaller down payment (3% to 5%) than conventional loans (20% to 25%). It can argued whether this is a good thing or not … borrowers should have some "skin in the game" vs. the decline in real wages over the last generation makes it more difficult for avg people to save for a large downpayment.
The credit requirements for FHA aren't as stringent as the banks, but they are far from the non-existent requirements of the sub-prime days. PLENTY of people are turned down for FHA loans.
At the end of the day, the gov't has two choices, not expand FHA usage and let the market shake everything out or expand FHA and try to soften the downturn by supporting home purchases, but potentially create a future problem. Rightly or wrongly, politicians are always under pressure to "do something now" to help … regardless of whether their actions actually help or not. Allowing the market to sort things out would take to long and require a continued downturn in the real estate market. Not acceptable political options … don't blame politicians for looking out for their own short term interests … we (citizens) encourage this behavior!
Oh, BTW, while the 1994 Act that John Walker noted in his comment did help create the problem, don't just blame Obama, ACORN and the Dems for it … industry favored the law too to because it removed a lot of restriction from them and allowed them to CREATE sub-prime products. The Dems got more (many unqualified) people into homes and the Repub/Industry got to make rediculous profits from it … EVERYONE was happy. Furthermore, it was INDUSTRY (AIG, etc) that pushed the law (signed by Clinton in Dec 2000) to allow CDOs (Collataralized Debt Obligations) to be issued without ANY regulation! Drop the political posturing John Walker and realize EVERYONE had a role in creating the mess we got into!
Don't forget it was popular on both side. Remember one time head of HUD and former NY Republican Congressman Jack Kemp came up (correctly) with the "ownership society" concept that Barney Frank opposed. "People don't destroy what they own." He wanted to eliminate "public housing projects" and reduce renting. Frank countered, "Some people shouldn't be allowed to own their own home."
The problem was not the idea, "Home owners make for better citizens." The problem was the government bureaucracy to make it happen in a way designed to both fail and make the banks lots of money in the process. [Dodd and Frank, were the biggest recipients of contributions from the banking sector].
Blah, blah, blah!
Interesting, but not particularly actionable news, for people who have lots of time on their hands and live on the internet.
Blah, blah, blah!
Yikes!
Explain to me why any body is interested in subprime. Subprime is 5% or less??? Almost any other investment should meet or exceed 5%.
This is a question not a comment.
to Gary – maybe you are mistaking subprime to mean a subpar rate or below the prime rate? Subprime is meant to mean above average risk in this article, i.e. subprime credit. "Explain to me why any body is interested in subprime. Subprime is 5% or less??? Almost any other investment should meet or exceed 5%."
My two cents from the insiders point of view – FHA guidelines are bent and stepped over by lenders all the time. FHA rules are vague in many areas and enforcement for violating them is almost non-existant. My guess is that FHA will need to be rescued. Ginnie Mae relys on FHA's approval process for lenders and just got caught with their pants down with the Lend America debacle. It uncovered how Ginnie Mae does little to monitor its own quality control and understaffed.
Right on, Anon!
The requirements are bent and stepped over routinely. I sold a home in late 2008 to a guy who had been approved for a 2.5% down FHA loan. Talk about unqualified? The closing was postponed over a month because the guy could not find a way to make the down payment. He eventually found someone to loan him the money, but I kept expecting him to want me to loan it to him. The guy was upside-down within two months.
In my opinion, if you can't come up with 20% down, you should not want a home loan, and no one should give it to you. There is no way that taxpayer money should be used for these loans, or to guarantee them.
BTW, my daughter was clerking for a one-person mortgage broker at the time, and the broker was taking home paychecks exceeding $3.5 million every year!
I enjoy Money Morning.
I get tired of hearing that the US debt load and collapsing economy will bankrupt our grandchildren's future. Do the math! WE are going to live through this collapse within the next few years! When interest rates go up, watch what happens to the % of budget expended on interest only on the national debt. I agree the case against Ginnie Mae may be overstated – – but not by much. Wake up America: the rose is dying a slow socialist death, according to plan… We should fear the Democrats knee-jerk to save their 2010 election hides at all costs and create a false recovery before November at any cost to you and me..
Collectively ALL politicians that are in office or who have served since 1980 are at fault!
But as long as people like you stupidly think that one side is better than the other,then
America is doomed as this political game is played out! Reagan talked about the deficit in
1980, 30 years ago, and the national debt today is so huge that it is unpayable and
we wil default and have our currency forcefully devauled by the other nations of the
world especially those that hold our debt!!! If John MC Cain had won we would still be
the largest debtor nation in the world!!! The facts of our debt and national problems
do not change based on who the president is because every president inherits the
collective problems of the nation from every president and congress that went before
him!!!
Some of the people here have some idea of the magnatude of the problem. One of the cornerstones of the housing market is the "subprime loans" that are being made and were made. The banking industry is as much to fault as the Politicians. It is time to work on getting back to what the country did for almost 100 years before the "New Deal" stopped people from thinking. Save for the future by putting money away and using money to make money so that they could better themselves. Loans were short term and not lifetime things then and should be now. It is time to go back to that system and get out of debt. That used to be the best and main factor looked at to get extra cash for an emergency. It still is the best factor, not how much you can borrow on your existing paycheck and still put food on your table with borrowed money.
This story contains a lot of truth but not the story behing the story. As long as the US government continues to allow land owners and banks to speculate in the value of land and its rising prices, so will successive bubbles and bubble bursts create financial crises, bankruptcies and loss of progress in the macroeconomic structure of society. Our present system is unstable and it is caused by the unfortunate fact that unlike goods which are possible to produce, land is not and what we have must naturally increase in value (even without speculation in its value, which makes it more extreme).
What we badly need to stabilize the macroeconomic system is a tax on land values and less tax on incomes so as to allow the government to have about the same income. By taxing land values its speculation will cease and its value decline to more reasonable sums. More land will become available allowing more people to work without having for their employers to pay high costs for access to the land site they need to use.
The loss in land value will hit the banks hard but the answer to this is to make the changed tax regime slowly and in specified stages so that the speculators can get out knowing roughlt what's ahead. It must be done, there is no other way forward to recovery until land prices have run down by what ever means. Unless land becomes cheeper out unemployment numbers will stay high and this situation prevail or get worse so that taken overall it is better for the country to suffer some bankrupcies and savings losses, than for 10% of the population of workers to become poor and homeless. The subject is one of balanced losses, savings against potential earnings.
TAX TAKINGS NOT MAKINGS.
why in heaven's name didn't you say something about the prospects for Ginnie Maes as a future investment or prospects for valuation if already held?? Did I miss a paragraph or something?
I think it was president Truman that said "if you cant beat the United States Militarily than you have to beat it……. ECONOMICALLY!!!— CHINA" and now they are trading in a roundabout Currency of their own. Its time to Invest in OUR U.S.A energy microcaps —- Cancel the Debt on the people and since the banks went Broke we ALL get our Houses for FREE.. Increase my families Net Worth "DEED Me Please" Give US back Prosperity and the TAX off our Backs… At one time the people were the BANKS we had the money…. Then came the Developers … and the greed and the greed… not the Saving — and pushed A COUNTRY FOUNDED ON CHRIST to the cliff.. no Jesus no Blessings!
I am democrat,however,this administation is basically using the same financial team that were used to create the fall.Their reasoning is ,who is better to untangle the crisis than those who were party to the meltdown.Excessive profits off questional credit practices frighten me.This jobless recovery ,frightens me.It seems every problem finds it solution in more governmental spending and virtually no corrective measures.Requiring a larger downpayment will not drastically easy the cost of a total loss.This administation needs new financial advisors.
in the US economic stable, the bigger the pile of manure our government makes, the more the opportunity to find ponies like Ford and other ten-baggers. Lets focus on finding these gems, not carping on the well- documented ineptitude of the Government. These are indeed the worst of times and could be the very best of times if we choose to keep our eyes on the sliver of light that are shinning through, here and there.
Fred Nazem
Been there done that but our esteemed supreme court rejected that remember.
Funny, the supreme court had no problem when term limits for the president then
again it was Franklin D Roosevelt, a democrat so I guess that explains the courts
inconsistency!!!
TERM LIMITS NOW !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
They say 'when a butterfly flaps it's wings on one side of the planet a wind is felt on the other side' or something like that! It is incredulous that Politicians or Civil Servants introduce policies in order to achieve some goal or other, only to create a by-product, that often has devastating consequences on a hitherto apparently unforeseen area of our economy. In the UK, the influx of Eastern European cheap labour, in the 'good times' which occurred up to only 3 years ago, are now causing the unemployment of traditional UK workers (with mortgages). I recently had to lay off most of my workforce due to lack of work and decided to make a cold call at a project I lost out on. Not only was all the workforce Eastern European, the site manager, normally almost always an experienced, fully trained UK individual, was also an Eastern European. The E E labour rates I am aware are less than half of that of the competitive UK employees rates and would not be enough to pay off a UK mortgage anyway.. In hindsight this was bound to happen in a down-turn in the economy. The alarming thing is, the people who are paid with public taxes, and there are enough of them, don't seem to think these policies out …where is the Risk Assessment in terms of down side. Did anybody bring up this down side possibility. This situation seems to be prevalent on both sides of the Atlantic. Politicions want to make radical changes in areas where even a previously bad deal is best left alone, or at least only tweeked occasionally. We seem to jump from one radical policy to another..'frying pan into fire' then visa versa.
John
How APT,is Johns comment,but not even the half of it,not even touched on the primary education,and,criminality,in the Ghettos.Education,Education,has COST,COST,COST,with poor results.Socialbility has disappeared,envy and malice,has replaced it !
Hi!, Fellow Citizens:
Sometimes it's very hard to go from a conceptionalization to a realization but nonetheless moving towards realizations is inevitable. However, regards our entire economy, what's happening tells us what, regards our educational systems encluding those who study for a real estate liicense etc.? Can our educational systems be trusted for competance, astuteness, relevance, management skills, creative inputs/outputs? With so many professional people now populating this planet why are our plans failing us? Billions of $$$'s are spent now learning how to go broke; how to mismanage our finances; allow us to learn to take bribes etc.? Why is this being allowed in these modern times? To whom should Obama redistribute the nations wealth….to the unemployed from the employed or should jobs be created for willing workers seeking employment whether they're long term unemployed or not? Jobs that were shipped overseas are not coming back to the good ole USA anytime soon are they? Pluss all jobs need to provide their employees a living wage encluding the capability to purchase a home shouldn't we agree but when?
Russ Smith, California
resmith@wcisp.com
there is no value in liability.there is only a price.we do not manage finances,we manage debt.perpetual indebtness is the name of the game.be it yourself,be it government.there is nobody to blame.there are losers,and there are winners.like anything in life,you play it right,or you play it wrong.there are those,who control it.the rest are chess pawns,and off to work they have to go.one job,two jobs.50 hours a week,70 hours per week.chasing the mirage.stop buying houses,and we all can afford them soon.it is about decent,peaceful life,not the debt slavery.chasing the mirage.we are all in it,and there is no solution.play it right,because your work is not worth much.
Great Comments I agree but most will blindly pursue and follow the mirage
This current economic mess has it's genesis in two factors; 1) president Nixon taking us off of the gold standard and 2) president Reagan systematically devaluing all labor by firing the air traffic controllers. These two factors combined have caused irreparable damage to all economic activity and will not be corrected any time soon. You say home prices were overvalued and collapsed I say stock prices and ALL paper assets have been and still are overvalued in a similar fashion. Does any body remember 14,000 plus DJIA? These things are all connected and will not be corrected until those in charge finally recognize this and make the hard choices that must be made. Until then these boom bust cycles will continue to repeat with greater ferocity until the system completely collapses! Debt is just a symptom of the problem and there are many symptoms but it is not the cause! If there were no inflation
and a stable dollar backed by gold, silver & platinum existed many of these problems of toxic
assets would not exist. The unlimited creation of fiat paper assets by both the corporate
and government sectors has lead us to where we are today! True wealth comes out of the
ground always has and always will! Paper money is just a convenience used to facilitate economic transactions and activities!!! This current crisis was intentionally created to create
false wealth for those that manipulate paper assets in all it's various forms. There are always
winners and losers in the manipulated crisis just follow the money and this is clearly revealed!!!
Well said — thank you for pointing out the facts. Anyone that doesn't see the mirror image to the Fannie and Freddie corruption needs to wake up. And you're right, actually beyond those scopes due to the further manipulation by banks and their balance sheet "reporting".
I agree, we need jobs in this country or we'll continue to deteriorate further. However, this continuous bailout of government and banking failures on the backs of those still working hard needs to stop. Wake up taxpayers and think about who you're electing into office — before it's too late!!!
What to do? What action will make a difference? How about an alternative economy? How to avoid bad investments and control the rollercoaster ride? What are the real rules of wealth in these days of challenge to all we have assumed to be stable truths. Let's see the list of commandments. What is real wealth? What is essential for local government services? The American way has been and continues to be exploitation. What are the successful models that are alternatives to exploitation? We must look to the future for progress and not regress through continuing exploitation. Nothing is free or should be free (except air for breathing), so sustainable clean living is a must. Is there a financial investing parallel to clean living?
ginnie and freddy maes are heating the housing market with thier big gannig.But another thing is happenig in the goverment policy that doesn't meet an equilibrui between supply and demand in a macroeconomic way.this is creating an empty deflation and inflation that doesnt meet an equilibruim.that finacial crisis meet a recovery in the past that doesnt creates and economic expansion in the us economic develoment.In another way the production is high and the housing supose to be low but there is not enough jobs and the people are losing for forclosure their homes and not loans coming up.rafael d.
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[…] "In an era of increasingly stringent lending standards, the FHA's standards are laughably lax," Gilani said in a recent Money Morning editorial. "The almost inevitable insolvency of the FHA could rapidly undermine the fragile recovery of the U.S. economy. And it could plunge stock prices and bank viability to new lows." […]