-- Posted Friday, 23 October 2009 | | Source: GoldSeek.com
By R. D. Bradshaw
The last couple of weeks have seen financial market news services ablaze with articles and concern that the Federal Housing Administration will be the next billion dollar operation which will soon need taxpayer bailout funds. Bloomberg put the problem into perspective in a recent article by Jody Shennon on “FHA Shortfall Seen at $54 Billion May Lead to Bailout.”
Shinn wrote that “The Federal Housing Administration, which insures mortgages with low down payments, may require a U.S. bailout because of $54 billion more in losses than it can withstand, a former Fannie Mae executive said. ‘It appears destined for a taxpayer bailout in the next 24 to 36 months,’ consultant Edward Pinto said in testimony prepared for a House committee hearing in Washington… The FHA program’s volumes have quadrupled since 2006 as private lenders and insurers pulled back amid the U.S. housing slump…”
The backdrop for this potential trouble spot was allowed in the Money Morning newsletter of Sep 23, 2009 in an article on “How the US Government is Setting Us Up for a Second Subprime Crisis” which noted the first so-called subprime mortgage crisis which evolved over the years 2007-2009. During the first crisis, the Bush administration, the US Treasury and the Federal Reserve worked together through the reported needs of Fannie Mae and Freddie Mac to pump trillions of dollars into the subprime mortgage business.
Reportedly, the Fed in particular has already pledged something around $1 trillion to Fannie and Freddy to absorb their bad loans or loan guarantees (per the USA Today of Mar 19, 2009, in an article on “Fed to pump nearly $1.2 trillion into the financial system”). The latest Fed report for Oct 15, 2009 shows that the Fed now has $763 billion in mortgage backed securities (which are reportedly being carried by the Fed on its balance sheet at face value).
Money Morning on the Second Subprime Crisis
Money Morning next focused on the FHA and asked “Is the government creating another subprime-mortgage bubble?” This article framed the issue into a question asking if taxpayers will be on the hook for another $1 trillion in government debt?
With the first bubble and the home real estate meltdown by Fannie and Freddie (which were effectively taken over by the US government in a move called a conservatorship), the government has switched to the FHA and another agency called Ginnie Mae to further rescue the home mortgage business (or more correctly, rescue the banking industry). Per the article, the FHA has been creating new government-insured subprime loans, which it packages into government guaranteed securities for sale to banks. This “reflation” of the subprime bubble, per Money Morning, is being engineered for two 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.
Per the story, these FHA guaranteed loans are pooled and packaged into mortgage-backed securities (MBS) by the Government National Mortgage Association, more commonly known as Ginnie Mae. Ginnie Mae then insures these MBS pools composed of FHA loans. By early September, Ginnie Mae had guaranteed securities with a value of $680 billion. Money Morning says that the total may exceed $1 trillion by the end of 2010.
While the Government Sponsored Enterprises (GSE) Fannie Mae and Freddie Mac only had implicit backing of the US government, Ginnie Mae is fully backed by the good faith and credit of the US government, the same as US bonds and notes.
Money Morning says that the FHA and Ginnie Mae “have taken up where Fannie and Freddie left off, and are now the dumping ground for toxic mortgages.” In listing the problem areas with Ginnie Mae, Money Morning reported that “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.’”
The US Department of Housing and Urban Development oversees the FHA. In a recent Inspector General report from HUD, The HUD IG report stated that the “agency’s growth makes it ‘vulnerable to exploitation by fraud schemes’ and that it may need ‘Congressional appropriation intervention.’” Hence, the groundwork is being laid for some massive taxpayer assistance as the IG allowed.
In any case, it is clear that banks are getting rid of their Fannie and Freddie backed securities by putting them on 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. Thus, per Money Morning, “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.” Since in time, no one will want the new Ginnie Mae MBS, we can be sure that the taxpayers will be called upon to reimburse and subsidize the banks for losses they incur.
Money Morning adds “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.”
Thus, the toxic loans are being transferred to the Federal Reserve and being replaced by the banks with US taxpayer backed loans which, in time, will also prove to be bad (creating the second big real estate meltdown). But with Ginnie Maes, the banks will have their bad loans guaranteed by the taxpayers. Oh, what a scam this is.
My Take on a Third Mortgage Crisis
Besides these two meltdowns, which the nation has had and/or faces, there is still one more brewing off stage which will also bring catastrophic results to the FHA and Ginnie Mae as well and whatever remains of the US banking industry (excepting the big Rothschild Cabal banks which will largely escape the problems falling on the industry in general).
Last week, Goldsmiths 104 addressed the likelihood of up to one thousand more bank failures. This motion is underway primarily because of the bad receivables they still hold in real estate mortgages. Real estate loans are at least $15 trillion; and at best, only about half of the bad ones will be successfully pawned off on the taxpayers, per the above discussion on the first two meltdowns. This means that the banking and credits industries will still be stuck with several trillions of dollars in bad debts which they will have to absorb.
Consequently, in this Goldsmiths, let me next focus on another huge problem developing which could also prove to be catastrophic to the real estate and mortgage markets in the United States. On this one, I first read about it a few days ago in a story by Ellen Brown at Web of Debt on “LANDMARK DECISION PROMISES MASSIVE RELIEF FOR HOMEOWNERS AND TROUBLE FOR BANKS.” Ms Brown is an attorney and very appropriately reported on a new development in the real estate and mortgage businesses which will prove to be of profound importance in coming days.
This Brown report was based on a August 2009 Kansas Supreme Court ruling which may in time influence numerous other state courts on the ability of banks and lenders to foreclose on delinquent mortgages. In the case (Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834), the Court held that a “nominee company called MERS has no right or standing to bring an action for foreclosure.”
MERS is an acronym for Mortgage Electronic Registration Systems, a private company that registers up to 60 million US mortgages electronically and tracks changes in their ownership. The problem arises because the last many years have seen banks and lenders turn to the use of derivatives to package and sell mortgages to other investors (pension funds and other buyers in China and around the world). Sometimes, a mortgage on a particular property can pass through several hands before it reaches a final point and time.
If and when the property owner defaults on his note, the question of foreclosure surfaces. Apparently, many/most/all of the MERS recording procedures were made to grant MERS legal rights as nominee (instead of recording them with the local clerk of court as assignments). Thus, the agency overseeing these mortgages and following up on foreclosures is MERS in many cases and not the actual owners of the notes.
In commenting on the Kansas decision, Go-Toby.com noted that “Judge Dismisses Foreclosures because Banks Couldn't Prove they Owned the Mortgage” and added the comments of a local Florida attorney, Phil Chanfrau, who wrote: “When a borrower closes on a mortgage loan he usually signs a promissory note and a mortgage. The Mortgage is a pledge agreement. The note is the legal document proving the debt is owed, and is a fancy I.O.U. It can be sold (negotiated) to another bank. The right to foreclose depends on who owns the Note.
“Historically, banks were able to buy and sell mortgage loans, and when they did, a legal document called an Assignment of Mortgage was always filed in the local Clerk's office to prove the loan had changed hands. Filing an Assignment was cheap, costing less than $10, and it created a paper trail. When the loan changed hands several times, a new Assignment was recorded each time to show who the new owner was. The Assignment process was little more than a boring paper trail ‘formality’ until the housing boom but it has taken on huge ramifications. The way to link ownership (and the right to sue to foreclose) with the mortgage was through an Assignment, but there is not always an Assignment.
“Why? Because the ownership of the loans which were held by MERS ‘as nominee’ cannot be proven, and without knowing who owns the loan, the mortgage lien is unenforceable. One of the boilerplate mortgages during the housing boom often named MERS ‘as Nominee.’ If your mortgage names MERS ‘as nominee’ you may very well have a good defense to stop a foreclosure.
“The system may seem archaic, but it worked for centuries. Trouble is that some on Wall Street felt it was too slow and costly. In an era of electronic banking, Wall Street wanted a system allowing the instantaneous electronic transfer of entire mortgages, or just pieces of them.
“As part of the housing boom Wall Street created a huge electronic swap meet to allow banks to buy and sell their loans electronically. Bundles of mortgages were called Collateralized Backed Securities. They were insured by Credit Default Swaps. The entity which acted as the electronic clearing house and filing system keeping track of the loans which were sold is called MERS, short for ‘Mortgage Electronic Recording System.’ It was meant to be a modern day substitute for the clerk's office by eliminating filing fees, and speeding up the trading of mortgage loans. Banks saved over a billion dollars in fees by not paying to have Assignments of Mortgage recorded.”
Yet, even now, Mersinc.org still maintains that “MERS is a proper party that can lawfully foreclose as the mortgagee and note-holder of a mortgage loan… In mortgage foreclosure cases, the plaintiff has standing as the holder of the note and the mortgage. When MERS forecloses, MERS is the mortgagee and it is the holder of the note because a MERS officer will be in possession of the original note endorsed in blank, which makes MERS a holder of the bearer paper. MERS will not foreclose unless the note is endorsed in blank and held by MERS.”
It is unclear to me how many of the 60 million mortgages were handled with MERS designated as Nominee without recording instead of providing for Assignments with recordings. Undoubtedly, MERS will immediately discontinue the failed practice and revert to the legally proper method of handling the issue. In the meantime, MERS may go back and try to correct things still pending in the system. Of course, any and all foreclosures now in the pipeline with MERS listed as nominee may offer a perfect defense. This means the home owner can continue living in the home without paying on his mortgage; and the mortgage holder can’t do anything about it. It is my understanding that indeed many people are doing that thing right now. They are living in their homes without making payments on the mortgages.
There is another issue on this subject. Many of these mortgages have passed through many hands over many years. By now, many of the original loan records are now lost or can’t be found. Without the original signed documents, courts are not in any mood to grant foreclosures. Cases in Arkansas and now Massachusetts have ruled against MERS and the mortgage owners when the appropriate documentation has been lost.
With potentially 60 million mortgages involved, many of them may not be enforceable. In those cases, the property owners can seemingly continue to live on the property without making any loan payments (which will only go to promote more damage, vandalism and destruction to the properties). This thing may balloon up to present a major problem for a number of outstanding mortgages now held by banks and/or the FHA.
The Latest Move to Socialism and Another Melt Down in Progress
To add to the whole real estate/mortgage mess, the Obama administration announced still another new program on Oct 19, 2009. AP had this story by Martin Crutsinger on “Government unveils a new mortgage help” which seems to have surfaced as a result of a 2008 law designed to bolster the housing industry. The Obama people claim that the new program will help to support low mortgage rates and expand resources for low and middle income borrowers who want to buy or rent a home.
Per Crutsinger, “The program will feature two parts - a new bond purchase program to support new lending by housing finance agencies and a temporary credit and liquidity program to improve access by housing agencies to credit sources for their existing bonds… The government said the new effort was designed to provide hundreds of thousands of affordable mortgages for working families and enable the development and rehabilitation of tens of thousands of affordable rental properties.”
It is not clear who will run this new program; but since it was announced by Treasury Secretary Geithner and officials at HUD and the FHA (to provide support to local housing financing agencies), it would appear that the FHA will administer it, perhaps under some type of Ginnie Mae arrangement, as allowed above by Money Morning.
In whatever form this thing exists, we can bank on it that the US government will directly provide the money or guarantee bonds being sold by government/private sources to fund the program. This means a complete socialistic move in American housing and another new bail-out program for the big banks. The story made the point that local and state housing finance agencies have found it hard to raise money to fund real estate loans due to the current housing crisis.
Apparently, this new program will provide banks, lenders and housing agencies with money from bonds sold by or guaranteed by the US government. It will also provide money to rehabilitate damaged, dilapidated and worthless properties (in other words, the taxpayers will provide money to banks and others to restore their holdings of dilapidated and unlivable properties—this will be another payoff to the big banks to help them with their worthless, damaged and unlivable properties obtained thru foreclosures).
In all of the Obama administration pitch and spin operation to fool the suckers, no one bothered to explain “who” will buy these new bonds to rehabilitate, repair and renovate damaged and destroyed properties in the run-down inner cities of the US or to make more loans which will never be paid off unless it is by the government. Will it be the banks? Local housing authorities? Ginnie Mae? Or the Fed? My guess is that the Fed will buy most of them.
From my analysis, this new program is just one more huge government effort to bail out the big banks for their real estate mortgage liabilities/losses of something up to $15 trillion. The taxpayers are going to restore now worthless properties held by the big banks so that they can sell them or rent them out with Federal financing also supported by the taxpayers. This will be one of the most absurd boondoggles of all time. It will be a huge socialistic move to reimburse the big banks for their losses. The Rothschild Cabal wins big on this move. Now, you know why Obama was elected.
The Bottom Line
The way things are developing, the real estate and mortgage businesses seem to be sinking into the pits of more hopelessness. By now, we have in place perhaps three or four major problem areas which will further implode real estate prices and real estate mortgages even more drastically, if that’s possible. While a further collapse in real estate and mortgages will be very deflationary, gold may be helped as people turn to more reliable methods of saving wealth.
Many analysts and procrastinators have put forth their views on what has brought this crisis on in the real estate and mortgage fields. For my take on the problem, please watch for the Goldsmiths 106 and 107 which will be out within a few days to explain the whole cause of the meltdown in these businesses. This will be a fresh new approach not realized by many people in the financial analyst business.
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-- Posted Friday, 23 October 2009 | Digg This Article
| Source: GoldSeek.com
