Told ya so: Mortgage and Foreclosure Crisis, Part Deux

On April 12, I wrote about a potential second mortgage crunch, possibly beginning as early as this year.  There are tens—possibly even hundreds—of billions in Option Adjustable Rate Mortgages (ARM's) and unsecuritized ARM's scheduled for reset between now and September 2012. 

Option ARM's are mortgages where borrowers pay very little actual principal and interest, rolling unpaid P&I back into the loan.  Once scheduled account caps are hit, the loan "resets," changing the terms and conditions of the loan and potentially forcing borrowers to either make higher payments, refinance completely or go delinquent.  A large chunk of resetting loans are unsecuritized, meaning banks are servicing the loans with no backup from FNMA or FHMC (that’s Fannie Mae and Freddie Mac for those of you in Santa Barbara).  But agency-backed loans are still a big part of the problem, and the ARM portion of the agency portfolios are performing about as well as the sub-primes were in 2007-08.

As Credit Suisse warned last spring, ARM resets and delinquencies are going to be a problem for several years to come.  While the percentage of sub-prime loans in the future waves of resets are smaller than those in the 2008-2009 crisis, there are large numbers of shaky mortgages left on the horizon, and the horizon is closing quickly. From 2010 through 2012, more than $1 trillion in ARM's will reset.  Pay particular attention to the proportion of agency and Option ARM's.

If large numbers of these loans go belly up—and many competent analysts think they probably will—Who's going to bail them out?

Doug Ross @ Journal has a MUST READ, IN-DEPTH review of the unraveling foreclosure scandal.  There is compelling evidence of fraud on a massive scale—fraud that congressional oversight committees could have known or should have known about years ago. 

The Money Quote from Doug:

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Fannie and Freddie were raped and pillaged by connected Democrats like Franklin Raines, Jim Johnson, Jamie Gorelick, Tom Donilon, and many others. It was wracked by accounting scandals that mysteriously spawned generous bonuses for these executives. With the help of Democrats in Congress, it blocked eighteen separate attempts by the Bush administration to audit the entities and to implement traditional risk management controls.

Should the housing market collapse again, a large part of the blame must once again be assigned to the Democrat Party and its policy of wealth redistribution. The central planners' plans can't work, won't work and have never worked.

And you and I -- the beleaguered taxpayers -- are on the hook for their idiocy.
Barney Frank, Chris Dodd, Maxine Waters and the rest of the social engineering geniuses who protected Fannie Mae and Freddie Mac from regulatory oversight during the Democrat housing boom -- and their own outrageous and damning testimony can be seen here -- should be serving life sentences in Leavenworth.

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Barney Fwank: “I have some wetland real estate in Florida to show you.”

Found this video today on The Fox Nation, in which Barney Frank suggests its time to do away with Freddie Mac and Fannie Mae:

 

 

Abolition of Freddie Mac and Fannie Mae sound good on the surface.  But consider the source, in this case.  If you think this avowed Socialist is interested in reducing government’s influence over how ordinary Americans finance their homes, then he’s got some really cheap Florida wetland real estate he’d like to show you, too.

Barney Frank would impale himself on the Washington Monument before he’d let that kind of power and control slip from the hands of the federal bureaucracy.  It just ain’t gonna happen, sports fans.

I wrote about yesterday’s mortgage market summit here.  Just to recap:

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Here we are in 2010, with the consequences of credit market-meddling still being felt, and instead of walking back the CRA and the results-oriented process of forcing banks to load to bad (i.e., subprime) borrowers, they’re talking about more bailouts of Freddie Mac and Fannie Mae.  I haven’t even touched on the rank corruption found within those two organizations, but you can see why I’m not very confident that meaningful reform is in the cards.

What needs to happen is a gradual pullback of Freddie Mac and Fannie Mae’s participation in private sector loan creation.  Let banks make credit decisions based on the perceived risk of default, and make people learn to work, save and earn the American Dream.  Home ownership is a privilege not a right, and its a privilege that’s earned.  It does not come as a benefit of government largesse.  The proposals being floated for retooling the mortgage market system do nothing to restore the natural order, and simply kick an $11 trillion can down the road.

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Frank’s comments to Cavuto are either an Alinksyesque scare tactic, designed to frighten people into thinking federally guaranteed loans are going away and thus generate support for a bailout or mortgage forgiveness plan, or he has some other scheme that would replace Fannie and Freddie with even more social engineering and punishment for self-restraint and fiscal responsibility.  One of those two scnenarios will come true.  The other one—abolition—will not.

The day Barney Frank supports getting rid of these two GSO’s is the day the Mayan Calendar warned you about.

Gimme some feedback in the comments.

Gov't starts talks about new mortgage system—what could go wrong?

Remember that sweeping financial regulation reform bill that Democrats rammed through Congress earlier this summer?  Remember the elephant in the room that was left ignored?

Well, it’s kinda sorta starting to be not ignored anymore, and the prospects for addressing the real underlying cause of the banking crisis of 2008 don’t inspire a lot of enthusiasm:

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Talk of shrinking the government's involvement in the mortgage market is growing. Just don't expect action any time soon.

A conference Tuesday at the Treasury Department is the first of many steps toward restructuring the nearly $11 trillion mortgage market. So far, rescuing mortgage giants Fannie Mae and Freddie Mac has cost the government more than $148 billion. That number is expected to grow.

Treasury Secretary Timothy Geithner will address the conference but is not expected to offer an exit strategy Tuesday. The administration has said it won't offer its plan until next year.

Officials are pledging dramatic changes to the structure of Fannie and Freddie, which profited tremendously during good times but burdened taxpayers with losses when the housing market went bust.

"We will not support a return to the system where private gains are subsidized by taxpayer losses," Geithner said in remarks prepared for the conference.

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With Republicans likely to pick up seats in Congress in November, however, the Obama administration will need support from both political parties for the changes it proposes.

Reflecting this reality, Geithner will say Tuesday that "the failures that produced the system we have today were bipartisan. The solution must be as well."

Executives and mortgage experts are prepared to tell Obama officials that that the government must stay in the business of backing U.S. mortgages even if Fannie and Freddie disappear someday.

"At the end of the day, the government will still have a very large role to play," said Mark Zandi, chief economist at Moody's Analytics and a panelist at the event. Others include mortgage executives from Bank of America Corp. and Wells Fargo & Co, plus Bill Gross, managing director of bond giant Pimco and Lewis Ranieri, one of the creators of mortgage bonds.

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Geithner is either being intellectually dishonest, or he’s as clueless as the rest of this kindergarten crowd running the country.  The failures that produced the 2008 meltdown were far from being bipartisan.  The environment that allowed people with insufficient income or credit strength to finance homes they had no business purchasing was a whole-cloth manufacture of liberal Democrats, starting with the Community Reinvestment Act of 1977.  The act was originally intended to address a progressive feel-good objective of insuring that banks weren’t using a then-controversial process known as red-lining, where some banks would draw red lines on maps depicting areas that they would avoid lending in.  Banks’ loan-creation and community investment metrics were used to gauge banks’ processes in supporting all of the credit needs of the communities they served.  Sounds innocuous enough.

But the Clinton era changes to the bill, begun almost immediately upon inauguration in 1993, changed the consequences for banks that were considered “underperforming.” Essentially, banks were told in not-so-unclear terms that they would make loans to low-income groups, or their performance evaluations would suffer.  It went from being process-oriented to results-oriented, and the end game was completely predictable.  Picking winners and using government power to reshape markets is never, ever a good idea.

Here we are in 2010, with the consequences of credit market-meddling still being felt, and instead of walking back the CRA and the results-oriented process of forcing banks to load to bad (i.e., subprime) borrowers, they’re talking about more bailouts of Freddie Mac and Fannie Mae.  I haven’t even touched on the rank corruption found within those two organizations, but you can see why I’m not very confident that meaningful reform is in the cards.

What needs to happen is a gradual pullback of Freddie Mac and Fannie Mae’s participation in private sector loan creation.  Let banks make credit decisions based on the perceived risk of default, and make people learn to work, save and earn the American Dream.  Home ownership is a privilege not a right, and its a privilege that’s earned.  It does not come as a benefit of government largesse.  The proposals being floated for retooling the mortgage market system do nothing to restore the natural order, and simply kick an $11 trillion can down the road.

Gimme some feedback in the comments.

Lipstick on the pig of a pending crisis

The media, in its infinite hope that this pesky, scary mortgage meltdown will all go away and get better real soon now, is doing its level best to convince us that, despite some really painful numbers, things aren't all that bad.

Via the Associated Press:

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Millions of Americans are still likely to lose their homes in the coming years, but the foreclosure crisis is finally showing signs of subsiding.

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And not to be outdone, we have Reuters via MSNBC:

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Foreclosure activity fell in April as lenders repossessed homes at a record pace but started far fewer new actions against struggling homeowners, signaling a plateau in loan failures, RealtyTrac said on Thursday.

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Don't you believe that for one second. It's just so much lipstick on a pig.

On April 12, I wrote about a potential second mortgage crunch this year.  There are tens of billions in Option ARM's and unsecuritized ARM's scheduled for reset between now and January 11.  The Option ARM's are mortgages where borrowers pay very little actual principal and interest, rolling unpaid P&I back into the loan.  Once scheduled account caps are hit, the loan "resets," changing the terms and conditions of the loan and potentially forcing borrowers to either make higher payments or go delinquent.  Another large chunk of resetting loans are unsecuritized, meaning banks are servicing the loans with no backup from FNMA or FHMC. 

If large numbers of these loans go belly up--and many analysts think they could--Who's going to bail them out?  There's not enough money for TARP II.  I am not a doom and gloomer.  As a conservative, I have a predisposition to being optimistic and believing that, left to our own ingenuity, we'll get through any crisis and everything will work out.  We'll learn from our lessons and move on.

But we aren't left to our own devices and imaginations, and haven't been in decades.  The mortgage and home finance industry is another fine example of social engineering having precisely the opposite effect of what was intended.  Who do you think is going to be hit the hardest when all of the dust finally settles?  The people who banks would never have financed if government hadn't forced them to.

Extra Point: Read Purple Avenger's take at AoSHQ.