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It's yet another prime example of "The strong get more while the weak ones slave."
Private equity shops and institutional players are buying and packaging (securitizing) nonperforming mortgages from the Federal Housing Administration (FHA) and selling those mortgages to mutual funds and themselves.
On the surface, the U.S. Department of Housing and Urban Development (HUD) wants to minimize the cost to taxpayers. After all, we have to cover the insurance guarantees the FHA made on loans it backed but are now nonperforming or in foreclosure.
That's really nice of HUD and the FHA, thinking about us taxpayers. Maybe they should have thought about us when they agreed to guarantee payment on loans to less-than-prime borrowers who only have to put down 3% to get their loans.
But, whatever, they're from the government…
The FHA Is Here to "Help"
It's also nice that most of those loans, the FHA-insured ones, get packaged into securities and sold to institutional investors. Because, you know, those institutional investors, the same ones who package FHA loans into securities and sell them to each other and keep piles for themselves, need us to cover their backsides.
It's just the socialization of losses to protect poor wee banks and financial institutions.
The FHA is looking to cut its losses on mortgages it guarantees, right at the time the housing market is supposedly strengthening. And so it's gotten HUD's blessing to sell billions of dollars of loans at $0.70 or $0.60 on the dollar (or less) to some of the same players that bought them in their original packaged form.
Why now? Why is the FHA selling nonperforming mortgages and mortgages on homes in foreclosure to institutional buyers just as the market has bounced and is supposedly strengthening?
Well, here's why all of this is happening right now.
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.