The government is saving the mortgage industry by nationalizing the loses and handing the later profits to the bankers

Daniel Gross at Newsweek has now published a mainstream article that tells much of the unspoken the truth about the mortgage mess. He points out that the continued announcements over the last nine months that the latest gimmick to save the mortgage industry had solved the problem, only to be followed by new and larger problems, has made it very difficult to get investors to step in and refinance Freddy Mac and Sallie Mae.

The result is that the only remaining solution is for the government to take over those two agencies. Since Freddy Mac and Sallie Mae have been responsible for 70 of all mortgages sold in 2008, that means that the mortgage industry has already been nationalized. It belongs to the government. The only question is how explicit the ownership documentation actually is.

That means that the conservatives in government are directly responsible for subsidizing the losses while giving away all the profits in the mortgage industry since Alan Greenspan created the housing bubble by lowering interest rates to avoid a recession that would defeat Bush in 2004. [See Economics and politics of the Fed fund rate.]

The unregulated free market dreamed of by conservatives and pushed for by the Reagan Revolution has failed disastrously. The result is going to be more government subsidy, handing out taxpayer funds. The only question is whether the conservatives will obstruct efforts by the government to recover gains to pay the taxpayers back instead of just handing future profits to the bankers who created this mess.

Oh, wait. I forgot. Phil Gramm has told us all the Truth (as viewed by conservatives and Libertarians.) This is "this is a mental recession. .... We have sort of become a nation of whiners." Right. Phil Gramm and John McCain have theirs already in hand and to Hell with the rest of us.

Go read the Newsweek article. Then prepare for the lengthy period of stagflation that has already started.

Stories of financial problems from Credit Crisis

Why don't the finance experts know how much of the economy is going to be 'hit' by the fallout from the Mortgage crisis? Here are some examples:

E*Trades' problems E*Trade just sold a large batch securities backed by prime mortgages at fire sale prices. The problem has gone far beyond subprime mortgages.

They sold $3 billion worth of mortgages, of which $1.35 billion were prime secure mortgages to people with good credit ratings and good payment histories (prime, first-lien residential mortgages rated “AA” or better), for $800,000,000. That means they got $800,000,000 for the $1,350, 000,000 and nothing at all for the subprime mortgages! Those really good mortgages are worth 59% of face value in the current market.

The Florida local Government Investment PoolThe Florida “Local Government Investment Pool” is getting nasty. This Summer Florida Counties and cities had $27 billion in the pool. Then the credit crisis hit, and a lot of those governments got antsy and started withdrawing their money, so now it has only $14 billion. The State Board of Administration that runs the pool, and its three trustees, Governor Charlie Crist, Chief Financial Officer Alex Sink and Attorney General Bill McCollum, have declared that no other withdrawal requests will be honored. How widespread is this problem?

Nobody ever really knows precisely what's going on when a crisis like this hits. There might be as many as 100 pools like this across the nation, with assets of something like $200 billion.

They are supposed to offer daily liquidity for the public sector in much the same way that money-market funds do for the private sector. They are supposed to invest their clients' money in the safest possible securities, good old boring things like U.S. Treasuries, top-rated commercial paper and certificates of deposit.

It seems, however, that some of the commercial paper investments the Florida pool, and others like it across the country, purchased were backed by subprime mortgages and other things that have declined precipitously in value.

The people who manage the funds find themselves in the position of not being able to figure out exactly what the assets are worth, because they don't trade, or don't trade much, and no one seems to know what the stuff is. [Snip]

If enough participants withdraw, the pools will have to sell some of that stuff that nobody can figure out what it's worth. You can bet that Wall Street, which packaged and sold the stuff in the first place, isn't going to offer 100 cents on the dollar for it.

This means that not everyone will get all their money back. On Nov. 30, an advisory panel of local governments in the Florida pool held a conference call with members of the State Board of Administration.

You can also bet that the local governments that invested in those secure pools are not going to accept less than 100% of their investment back.

And it’s not just in the U.S.

The town in Norway The New York Times has the story of NARVIK, Norway, a town north of the arctic circle that purchased ‘secure’ investments in order to get a return on the money they did not need immediately but expect to need in the near future. The people of Narvik and those of three nearby town have lost at least $64 million Kroner, and maybe more.

Rental Property Where else is the mortgage crunch/credit crisis hitting? California, of course.

Unable or unwilling to sell their homes at declining prices, homeowners in Riverside and San Bernardino counties are converting them to rentals, glutting the market and causing rents to fall for the first time in years, according to Inland property managers.

Among the new landlords are investors who bought houses at peak prices and have watched their equity evaporate or homeowners who have relocated, leaving behind a house they can't sell.

There are so many Inland homes for sale, that even if no more come on the market, it will take more than two years to sell the houses available, according to the California Association of Realtors. [Snip]

"It is a good time to be a renter and a lousy time to become a landlord," said Denver. He said in the past six months, the average time it takes to rent out a house in Perris has lengthened from two or three weeks to two months. Rents have fallen about 5 percent. He said the average monthly rent has slipped to $1,100 in Perris.
Denver said today a $300,000 house purchased with a 7 percent down payment would likely require a monthly mortgage payment of $2,500. The same house, he said, can be rented for $1,300 a month, "and the owner has to do the repairs."

The common thread here is that a lot of people bought what were supporse to be safe, secure investments and treated them as such. The risk was hidden from the investors, so they literally have no idea how risky the investments they own, or as is the case of the people trying to sell homes, they can't sell because no one can get mortgages to buy them out.

The Florida investment pool mirrors what is happening to a lot of investment funds. What if your retirement is in one of them - well, you still have Social Security, as long as it is not privatized. Had Bush privatized Social Security, it would be going down the tubes just like the investment funds in Florida, in Norway, and in pension funds who don't dare tell anyone how much trouble they are having. That's assuming they even know right now themselves. They will know.

There are two big points. First, no one knows how extensive the problems are, but right now we are learning that they are extensive. There are going to be a lot more stories like these. Second, Things are getting worse and will continue to do so for an unknown period of time.

Let's not forget who brought this financial disaster down on us. See my Saturday post laying out Who's to blame for the credit mess.

Fed takes action to improve market liquidity

Bondad reports on the market reaction to the Federal Reserves 1/2% decrease in the discount rate.

What is "the discount rate?"

US banks use a fractional reserve system. All this means is a bank much have x% of its total assets on hand at any given time. However, in a banks usual business affairs their reserves may dip below this percentage amount. When this happens, banks must borrow short-term money from somewhere. Usually, they go to other banks. The interest rate banks charge each other is the Federal Funds rate. In addition, a bank can go directly to the Federal Reserve and borrow money. The Fed will charge the bank the discount rate. Going to the Federal Reserve to borrow money is a last resort and is usually considered a sign of weakness. Therefore, lowering the Discount rate is largely a symbolic gesture because it isn't used nearly as much as the Federal Funds rate.

Go read Bonddad's report on what the market did as a result. He posts neat tech analysis charts.

More mortgage loan problems

The financial problems caused by the subprime mortgage market is spreading. It is a big problem that is currently getting larger, and it was easily predictable. It was caused by the political manipulation of the housing and mortgage credit market to allow the Bush administration to mismanage the economy but not pay the political consequences before he ran for reelection in 2004.

The problems today were caused by Alan Greenspan, but he did it for a good cause. He knew that George Bush had to be reelected President in 2004. So what does the problem look like today?

From this morning's New York Times:

When an investment banker set out to buy a $1.5 million home on Long Island last month, his mortgage broker quoted an interest rate of 8 percent. Three days later, when the buyer said he would take the loan, the mortgage banker had bad news: the new rate was 13 percent.

“I have been in the business 20 years and I have never seen” such a big swing in interest rates, said the broker, Bob Moulton, president of the Americana Mortgage Group in Manhasset, N.Y.

“There is a lot of fear in the markets,” he added. “When there is fear, people have a tendency to overreact.”

The investment banker’s problem was that he was taking out a so-called jumbo mortgage — a loan greater than the $417,000 mortgage that can be sold to the federally chartered enterprises, Freddie Mac and Fannie Mae. The market for large mortgages has suddenly dried up.

For months after problems appeared in the subprime mortgage market — loans to customers with less-than-sterling credit — government officials and others voiced confidence that the problem could be contained to such loans. But now it has spread to other kinds of mortgages, and credit markets and stock markets around the world are showing the effects.

Those with poor credit, whether companies or individuals, are finding it much harder to borrow, if they can at all. It appears that many homeowners who want to refinance their mortgages — often because their old mortgages are about to require sharply higher monthly payments — will be unable to do so.

The problems are both with borrowers who have poor credit and with other borrowers with better credit who were sold loans which were too risky, such as Adjustable-Rate Mortgage Loans with an initial monthly mortgage payment that in some cases did not even cover the interest owed for that month. The interest was simply added to the existing loan to be paid off later.

From The Associate Press, published in the Fort Worth Star-Telegram:

So far, less than 4 percent of the option and interest-only ARMs are delinquent, well below the 14 percent rate for the subprime market, where about $1.5 trillion in home loans are still outstanding, according to data from the research firm First American LoanPerformance.

But many industry observers suspect that the biggest problems will emerge during the next 16 months as shoddily underwritten ARMs made near the real estate market's peak in 2005 and 2006 climb to higher interest rates.

The Mortgage Fondation pointed out that:

Last year, negative amortization loans accounted for 9.9 percent, or $350 billion, of all mortgages nationwide, up from just 0.4 percent as recently as 2003, according to LoanPerformance.

Thornberg said he believes that the mortgage market turmoil could lead to a recession. "This snowball is just 20 percent down the hill. It's nowhere near the bottom," he said.

The problems are not just with Adjustable-Rate Mortgages (ARM's.)Mortgage companies have also been issuing what were called "no documentation" Mortgages, those issued based on nothing more than the customer's assertion that they had a job, a given income and certain assets.

So why were these problems not stopped sooner when the damage to the American economy and the world credit markets would have been a lot less? Simple. The damage to Bush's reelection hopes in 2004 would have been tremendous.

This all goes back to the economic problems that George Bush had prior to his reelection in 2004. The Federal Reserve Chief, Alan Greenspan, told the Credit Union National Association meeting in a well publicized speech given in February 2004:

Americans' preference for long-term, fixed-rate mortgages means many are paying more than necessary for their homes and suggested consumers would benefit if lenders offered more alternatives.

He knew what he was proposing would lead to a lot of foreclosures and personal financial tragedies when the housing bubble finally burst, but the important thing was that Bush be reelected. Credit standards and verifying documentation went out the window. He was pumping up the housing market in 2004 before the election.

In February 2005, after Bush was safely reelected, Greenspan started to slowly increase the interest rates. The effect was to stop the increased prices of homes, but it was too late. The damage was done, and to avoid the inevitable credit crunch the poor underwriting standards and risky loans were continued.

Why not? The mortgage brokers made their money up front. Any sale was a profit, and the loan was sold to a lender. Also, people do not shop for mortgages. They buy a house. The mortgage is a very complex technical document and if the mortgage broker starts to explain the real risks, the customers quickly go to someone else who assures them the loan is safe. Since both the realtor and the mortgage broker get paid only one sale of the home, any conscientious mortgage broker will quickly find no Realtors bringing him customers. The result is that most people who bought such loans did not realize the risk they were taking (nor did they know they were taking it to reelect Bush in 2004.)

The housing bubble started during the dot com boom days, but when Bush was first elected appointed President, the economy was already beginning to turn down. He couldn't afford that, so he and Greenspan did not shut down the more risky housing loans which were the only major prop under the economy.

I'm sure Greenspan thought they could get the problems under control soon, but the ignored problems quickly passed into the lead-up to the 2004 election. Every President in the twentieth century who ran for reelection in a period of economic downturn lost. Rove knows that. So the government let the rotten credit conditions run until after the election.

The increased interest rate was certain to cause foreclosures, but real estate downturns take a long time to work themselves out. This one started in 2005 when the Fed started tightening the interest rates and is only now becoming really bad. There was no effort to rein in the extremely loose credit standards because that would have just made the problem worse, and I am sure Greenspan hoped the bad results of the housing bubble collapse would work themselves out relatively mildly. Obviously it hasn't happened that way.

It's not any surprise (in hindsight) that the problems have spread outside the subprime mortgage market. The entire mortgage market has been used since 2001 to prop up the largest economy in the world while the government was mismanaging taxing and spending to a degree never before seen.

The surprise is that the shaky system could have been misused by Bush and Greenspan for so long. But for all that the economists think they know, they will freely admit that the timing of macroeconomic changes is not part of it. The Fed knew that increasing the interest rate would stop the housing bubble, and that there would be associated negative results. That's why they didn't try until 2005. They didn't know how extensive the problems would be, nor how long they would take to appear.

Nor did they know, or care, how many homeowners would suffer. Why should they? They are Republicans, after all. It's all just politics to Republicans, and the wealthy aren't being hurt by this. Just the rest of us peons.