Feb252013
Two recent bank bailouts and another on the way in 2013
The banks are stealing your money… again.
The US Government and the federal reserve spent billions bailing out the banking system in 2008 from a financial crisis created by foolish lending. Commercial banks and Wall street securitizers pumped trillions of dollars into dodgy mortgages, much of which was refinance money given to Ponzis, so it wasn’t just late purchasers who were in trouble. When the toxicity of the lending products became apparent, a credit crunch ensued, and residential real estate prices plummeted by 30% or more nationwide. With limited collateral backing their bad loans and millions of delinquent borrowers, lenders couldn’t foreclose on all the properties to recover their capital. The problem was so large that the banks couldn’t absorb the losses without bankrupting the system. Given the political influence of the financial sector, politicians decided to bail out the banks with your tax dollars. So millions of Americans who did not participate in these private, greed-induced financial transactions ended up covering the losses.
But it gets worse. The banks weren’t content with just an initial round of bailouts. They continue to use their political influence to seek ongoing bailouts, not the direct cash infusions of the financial crisis, but stealth bailouts where the interests of taxpayers are ceded in favor of bank profits. There were two recent stealth bailouts, and one more is on the way.
Bailout Outrage #1:
Don’t Blink, or You’ll Miss Another Bailout
By GRETCHEN MORGENSON — Published: February 16, 2013
MANY people became rightfully upset about bailouts given to big banks during the mortgage crisis. But it turns out that they are still going on, if more quietly, through the back door.
The existence of one such secret deal, struck in July between the Federal Reserve Bank of New York and Bank of America, came to light just last week in court filings.
That the New York Fed would shower favors on a big financial institution may not surprise. It has long shielded large banks from assertive regulation and increased capital requirements.
Still, last week’s details of the undisclosed settlement between the New York Fed and Bank of America are remarkable. Not only do the filings show the New York Fed helping to thwart another institution’s fraud case against the bank, they also reveal that the New York Fed agreed to give away what may be billions of dollars in potential legal claims.
Here’s the skinny: Late last Wednesday, the New York Fed said in a court filing that in July it had released Bank of America from all legal claims arising from losses in some mortgage-backed securities the Fed received when the government bailed out the American International Group in 2008. One surprise in the filing, which was part of a case brought by A.I.G., was that the New York Fed let Bank of America off the hook even as A.I.G. was seeking to recover $7 billion in losses on those very mortgage securities.
It gets better.
What did the New York Fed get from Bank of America in this settlement? Some $43 million, it seems, from a small dispute the New York Fed had with the bank on two of the mortgage securities. At the same time, and for no compensation, it released Bank of America from all other legal claims.
This is an outrage. Bank of America should be liable to the US taxpayer for repayment of funds that were used to cover losses from their toxic securities. To release them from this liability is no different than giving them a direct cash gift.
But Walker F. Todd, a former official at the Federal Reserve Bank of Cleveland, warned: “As a public entity, the Federal Reserve needs to take its custody of public funds seriously enough to ask for more than merely nominal compensation when it is giving up things of value to a bank holding company. If the central bank starts releasing binding legal claims for nominal compensation, it looks like just one more element of the secret or back-door bailout of the banking system.”
It looks like a back-door bailout because it is. The federal reserve hopes this bailout is too complex for people to understand and that very few people will find out. The federal reserve wants to maintain its independence, but if they continue to provide taxpayer-funded bailouts to their cronies, they need to come under stronger federal government oversight and control. This kind of activity should require the approval of congress, after all, they gave away billions of taxpayer dollars.
Bailout Outrage #2:
The Second-Mortgage Shell Game
By ELIZABETH M. LYNCH — Published: February 17, 2013
A lesser-known but equally grave problem is that banks have been given a backdoor mechanism to continue foreclosures at the same pace as before.
The problem involves second mortgages, which millions of homeowners took out during the housing bubble. It’s estimated that as much as a quarter of all mortgage debt in the United States is in the form of second mortgages. Some of these loans were taken out to finance home improvements; others were part of a subprime product known as an “80/20 mortgage,” in which 80 percent of the purchase price was covered by a first, adjustable-rate mortgage, and the remainder by a second mortgage, often with a much higher interest rate.
And many were taken out by HELOC abusing Ponzis who spent it like drunken sailors.
The second mortgages have given the banks a loophole: each dollar a bank forgives goes toward fulfilling its obligation under last year’s settlement. But many lenders have made it a point to almost exclusively modify secondary loans while all but ignoring the troubled, larger primary mortgages.
It’s a real problem: when it comes to keeping your home, it’s the first mortgage that counts.
… When a lender forecloses on a first mortgage, the house in question is typically sold at auction. If the house is worth less than the loan amount, the bank gets only part of its money back. But after the sale, of course, there’s no asset left to pay off any of the second loan. The holder of that second loan — which has lower priority than the holder of the first — gets nothing.So a lender can forgive a second mortgage — which in the event of foreclosure would be worthless anyway — and under the settlement claim credits for “modifying” the mortgage, while at the same time it or another bank forecloses on the first loan.
Banks carry billions of dollars of worthless second mortgages on their balance sheets. The fact that they get credit toward their settlement obligations for recognizing a loss they should have recognized years ago is another outrage. If the banks hadn’t convinced regulators to suspend mark-to-market accounting, they would have been forced to recognize the losses on hundreds of billions of dollars in worthless second mortgages years ago. Now, they are selectively recognizing these losses and getting kudos for doing so. Unbelievable.
The upshot, of course, is that the people the settlement was designed to protect keep losing their homes.
Many of the political left suffer from this delusion. The settlement was never designed to prevent people from losing their homes. If that occurs for a few, its a bonus, but the real purpose was to give the banks a shield against future litigation and provide politicians for political cover for providing this shield. The cost of the settlement, the supposed punishment, is being covered by recognizing losses they would have incurred anyway. It’s a sham.
Bailout Outrage #3:
Obama Renews Call for Refi Bill
WASHINGTON – For the second consecutive State of the Union speech, President Obama called for legislation that would allow struggling homeowners to refinance their mortgages and take advantage of lower interest rates.
In a speech almost entirely devoted to other issues, Obama said the housing markets were “healing,” noting that “home prices are rising at the fastest pace in six years.”
But he said Congress must do more, and urged lawmakers to pass a pending bill that would make it easier for homeowners to refinance their homes.
“Even with mortgage rates near a 50-year low, too many families with solid credit who want to buy a home are being rejected,” Obama said. “Too many families who have never missed a payment and want to refinance are being told no. That’s holding our entire economy back, and we need to fix it.” …
Democratic Sens. Robert Menendez of New Jersey and Barbara Boxer of California reintroduced a bill last week that would help borrowers with Fannie Mae and Freddie Mac mortgages to refinance.
I wrote about the upcoming bailout in the post, Menendez, Boxer plan bill to transfer bank losses to US taxpayer. If passed into law, the legislation would encourage private-label mortgage backed securities to be repackaged into lower interest loans backed by the GSEs even if these loans are severely underwater. Since underwater loans are the most likely to go into default, and since underwater loans create the largest default losses, this bill transfers billions of dollars in future losses and trillions of dollars in liabilities away from the private sector and on to the back of the US taxpayer.
And what does the taxpayer get out of it? Nothing.
It may benefit a few loanowners who will get to refinance at a lower rate — an inappropriate use of public funds to benefit private parties — but the cost to taxpayers will be enormous. The real beneficiaries of this law are the banks and investors holding these toxic assets on their balance sheets. Right now, they have to reserve significant accounting reserves for future losses. Once these loans get refinanced, the loss reserves can be eliminated boosting their capital ratios and improving their bottom line.
The other bailout
We shouldn’t forget that the biggest bailout of the banks isn’t recognized as such: low interest rates. The federal reserve is doing its part to reflate the housing bubble and put collateral value behind their bad loans. This is the biggest bailout of all, and everyone will pay for it through higher house prices and future inflation. And they’re not done bailing out the banks yet. I expect more of the same going forward.
Lack of Inventory, Not Shadow Inventory, Is the Concern Today
DS News took some time to chat with Daren Blomquist, VP of RealtyTrac, to get a reading on the current state of the foreclosure market and what is expected to come.
Although foreclosures served to strip homes of their value during the housing crisis, Blomquist says foreclosures will be seen as a welcome sign this year and act as a stimulus.
While this may seem counterintuitive, Blomquist said, “because of the severe lack of inventory available for sale, foreclosures could actually fill that inventory and provide more fuel to the fire that’s been slowly building over the past year as more sales occur.”
Though, he added, “this is assuming foreclosures are being done property,” meaning according to regulation and legislation that’s been passed to protect homeowners.
Currently, Blomquist says there are still a lot of foreclosures that need to be dealt with…
As for fears the release of foreclosures will bring down prices, Blomquist isn’t worried this will happen to the market.
“This so called shadow inventory never hit full force, so now I think we’re at a point where the pendulum has swung completely the other way and the housing market needs more inventory, so 2013 would be a serendipitous time for banks to release that inventory,” he said.
Looking ahead, Blomquist says RealtyTrac is still expecting to see around 600,000 REOs in 2013 based on the number of foreclosure starts in 2012, which hit about 1.2 million. Blomquist explained the roll rate is for about 50 percent of foreclosure starts to end up as REOs.
He also says completed short sales are expected to exceed the 2012 number, which will likely be around 1 million.
Median Home Price of Existing Single-Family Homes Falls to Lowest Level in 10 Months
Economic data for the week ending February 22—particularly for housing—was less than encouraging. A small increase in existing-home sales was the only bright spot, but that was weighed down by another drop in the median price of existing single-family homes to their lowest level in 10 months. The word “another” is critical because it means the drop in inventory in December did not result in higher prices. Indeed, the supply of homes for sale fell again in January, this time to the lowest level in 13 years.
Builders aren’t picking up the slack as new housing starts fell in January. While multifamily starts pulled down the construction data, the increase in single family starts was microscopic even if it did push starts to the highest level since July 2008. In July 2008, the seasonally annual adjusted rate of states was 615,000, only about one-third of what was in January 2006 when builders broke ground on new homes at the rate of 1,823,000 annually.
Housing Affordability Climbs Higher in Q4
Even as prices rise in many markets across the country, affordability remains high. In fact, housing affordability rose close 1 percentage point up to 74.9 percent in the fourth quarter of 2012, according to the Housing Opportunity Index released Friday by the National Association of Home Builders (NAHB) and Wells Fargo.
NAHB attributes this continued high affordability amid rising prices to “exceptionally low interest rates.”
With mortgage rates climbing in Qtr 1 I wonder how they are going to spin it?
Just being a Too Big To Fail bank means you will always get a bailout. The banks will use scare tactic. If we fail we take the whole economy with us, so you MUST bail us out.
This is just my feeling I don’t have evidence. But it seems like these banksters want more bailouts before we hit the wall with QE (which is still a bailout). More alarms are being raised about the growing number of mortgages owned by Federal Reserve and then end game. So, it makes sense that other bailouts are being attempted. How much can we stick to the taxpayer before mortgages rates have to increase.
The sad part is that this injustice has been accepted by the people. We didn’t get outraged enough to break up the too-big-to-fail banks, and now they know as long as they stay that large, the government will bail them out of any losses. Risk taking should explode, and later the economy will too.
What else can you expect from a bunch of whipped dogs dumbed down over generations by a closet communist education system?
You argue that the Fed needs to be more closely regulated by the government. The government is 100% complicit in this arbitrary tyranny. The Fed IS the 4th branch of government. Fed independence? Are you naive?
When ordinary bloggers are finally expressing outrage, it is a sign the problem is big, big enough that there are now only 2 remedies:
1. Nonviolent remedy – citizens exchange federal reserve notes for physical gold coinage.
2. Violent remedy – we find out why the 2nd amendment is still 100% relevant.
If we choose neither, the Fed, banks, and government will become increasingly flagrant with these bailouts (THEFT) and we will then scramble for remedy #1 and #2 due to runaway inflation.
I don’t think it’s even political. As long as people can get their goodies (phone, internet, cable) they are happy. Also, if they has access to credit where they can default later.
Working is not being rewarded as much, but bankruptcy, squatting, default gets you rewards. Saving your money and earning gets you taxes.
It’s sort of scary change in values…I don’t know when it happened but how do we go back?
hard money and allow failure back in the market.
“The Fed IS the 4th branch of government”
The FED is NO more federal as Federal Express.
““The Fed IS the 4th branch of government”
The FED is NO more federal as Federal Express.”
Government and the federal reserve are subsidiaries of Bank of America.
Regulators may drop the ball on down payment requirements
So regulators, who have tightened the screws on a lending system that had run amok, are thinking about easing up. The danger is that by trying to add more fuel to housing’s revival, they could again sow the seed for long-run problems.
The housing bubble showed that efforts to extend homeownership by loosening lending criteria can backfire badly. One thing that became clear: the need for home buyers to have a stake in what they purchase, or skin in the game.
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Years ago, home buyers had to put down at least 20% to qualify for a mortgage. That later fell to 10%, with insurance. Then came no-money-down mortgages. While fueling the boom, this worsened the bust. Even the slightest fall in home prices would leave mortgage holders owing more than their houses were worth.
At the same time, many mortgage originators stopped holding loans they made, finding it more lucrative to package and sell them to investors. That opened the door to looser underwriting—a practice that came back to haunt investors and lenders themselves.
Now, as regulators work to finalize a new rule that will dictate whether a bank has to retain some portion of a pool of loans before selling it to investors, there are calls to again loosen down-payment requirements. When regulators first proposed this rule, for what would be a Qualified Residential Mortgage, there was a 20% down-payment requirement.
Following opposition from banks and borrowers, regulators look likely to waive any such requirement. During a recent Senate hearing, Federal Reserve Governor Daniel Tarullo said regulators would consider aligning requirements for this kind of mortgage with rules recently passed by the Consumer Financial Protection Bureau. Those didn’t include any down-payment criteria.
I’ll be surprised if there isn’t a token downpayment required of at least 5%.
Boy, that means more bailouts in the future.
That’s my thought as well. Lenders will find a way to get zero down loans considered qualified residential mortgages, and we will inflate another housing bubble, but this time, the taxpayer will be on the hook for the losses.
With a business model that’s parasitic in construct, of course they’re stealing people’s money. Again. For more clarity, simply take a look at the basis of one of their most popular products; a mortgage….
a banker sits down at a computer, types-in some digits, hits enter and a mortgage is magically created. But, the interest is not.
The theft through fractional reserve lending won’t go away. For as much as some decry it, the banks make too much money from it to ever give it up. In fact, if you look at the history of banking, it’s largely an attempt to make fractional reserve lending work.
The bailout theft is a different kind. It’s a direct transfer of taxpayer wealth to private corporations. It really is theft. It may not be recognized as such because the theft is indirect, but it’s still theft. And the people in charge aren’t stopping it. In fact, they are encouraging and facilitating it.
Fractional reserve lending would be severely curtailed if banks were not backstopped by the taxpayer and if they had to post capital on mark to market losses. Yes, this means completely abolishing the FDIC. It only serves as an optical backstop anyways. The FDIC has nowhere near sufficient funds to back depositors.
Get rid of the FDIC. Banks would shape up or ship out overnight. Of course this would mean many large banking institutions fold, but the fact that the banks are so large and in such dire straits is 100% proof the FDIC has removed the free market regulation aspect from the sector.
The problem will only get worse until the general population wakes up to this reality.
Short of a complete societal breakdown, the populace won’t wake up. If you have major energy disruptions, food shortages, general mayhem in the streets, then maybe some will start to get angry. Too many have taken the blue pill.
Uh… without govt subsidation, the banks would be unprofitable. In fact, they would not exist. Not only that, but what destroys their ‘credibility’ as a legitimate entity is the fact that even despite massive gov subsidation, the big banks remain technically insolvent. Oh wait, just change the accounting rules. LOL
Day traders and short sellers are also parasitic in nature. Jus sayin’.
What does lumber know about the mainstream media’s so-called “recovery”….
4-day slow bleed, then ‘whacked’ today….
http://app.quotemedia.com/quotetools/chartcache/46720.png
I also noticed interest rates are headed back down.
Are you thinking negative 1st Quarter GDP?
I wonder if the decline in lumber prices foretells weakness in construction spending. Prices of building materials should be moving higher, not lower.
http://www.showrealhist.com/RHandRD.html
People don’t understand inflation. They see nominal gains, and they are happy. They don’t realize how much inflation makes those gains an illusion.
Bipartisan housing commission wants GSE dominance erased
By Megan Hopkins February 25, 2013 • 11:40am
In many respects, our housing system is outdated and not equipped to keep pace with today’s demands and the challenges of the imminent future, the Bipartisan Policy Center’s Housing Commission (BPC) wrote in a report released Monday.
In its ongoing effort to study the key issues that form the basis of a resilient housing system, the Housing Commission proposed a number of goals to ensure the national housing system allows individuals and families to have a say in their living situations.
The BPC Housing Commission believes that by changing our nation’s housing finance system, the range of ownership and rental housing choices will be increased for consumers at all stages of life. The uncertainty in the country’s housing finance system has minimized consumers’ choices, specifically when seeking a mortgage, the report asserts.
To rebuild the housing finance system, the BPC says the private sector must play a bigger role in bearing some of the credit risk. Currently, the government supports more than 90% of single-family mortgages via entities such as Fannie Mae, Freddie Mac, Ginnie Mae and the Federal Housing Administration. The government also supports roughly 65% of the rental mortgage market.
“The dominant position of the government that currently exists is unsustainable,” said Mel Martinez, former U.S. Senator and former secretary of the U.S. Department of Housing and Urban Development.
Reducing the footprint of the government and increasing private capital participation will protect taxpayers while providing for a greater diversity of funding sources, the policy report suggested.
However, the housing commission says continued government involvement is crucial to ensuring mortgages continue to be available and affordable to homebuyers who qualify.
In rebalancing the nation’s housing finance system, the commission proposed the dissipating and ultimately the elimination of Fannie Mae and Freddie Mac after a five-to-10 year transitional period.
The commission proposed that the GSEs be replaced by an independent, wholly owned government corporation — the “Public Guarantor” — that would provide guarantee investors the timely payment of principal and interest on these securities. The model proposed is similar to Ginnie Mae.
After all private capital ahead of it has been exhausted, the Public Guarantor would provide a limited catastrophic guarantee.
“A strong, vibrant secondary market for these securities is essential,” Martinez said.
This proposed entity would put the government in the fourth-loss position following borrowers and their home equity, private credit enhancers, and the corporate resources of the issuers and servicers.
The public guarantor will hold multiple responsibilities including, qualifying institutions to serve as issuers, servicers and private credit enhancers; ensuring the institutions are well capitalized; establishing the guarantee fees to cover potential catastrophic losses; ensuring the actuarial soundness of two separate catastrophic risk funds for the single-family and rental segments of the market and settling standards for the mortgages backing government-guaranteed securities.
The lack of inventory coupled with exceptionally low interest rates is fueling a significant rise in prices. While a lot of local real estate agents are trumpeting the rapid price improvement as a sign the market is recovering, the ones I know aren’t benefiting because there is simply no inventory. In North County San Diego, where I live and I think is analogous to Irvine in many ways, I’m hearing the same refrain from agents when I go to any open house: “Better buy or you’ll miss out”.
It’s all so damn manipulated. If the economy tanks – and it might if increased taxes and higher gas kills off the consumer and/or rates go higher, this mini-bubble will surely pop.
“I’m hearing the same refrain from agents when I go to any open house: “Better buy or you’ll miss out”. ”
I have to stop myself from laughing out loud in their face when I hear this. Each time I do, my respect for realtors is reaffirmed at its zero point.
I think even a small increase in interest rates will cause sales to plummet. If interest rates don’t remain low, first sales will dry up, and if interest rates move much higher, prices will go back down again.
I would think, that you have to consider the 10 bps increase in FHA MIP and its existence for the life of the loan beginning 4-1-2013, as a decent “rate increase” looming. Or are homebuyers really unable to understand how big life-of-loan mortgage insurance is?
I really think they only care about the monthly payment. I think that is why affordability products were so popular, they didn’t understand the risks.
“Or are homebuyers really unable to understand how big life-of-loan mortgage insurance is?”
Every buyer believes they will own their house forever but that they will refinance their mortgage every three years to extract some equity. Neither assumption is true, but that’s what most believe, and that’s what they base their decisions on.
Hapless sheeple PUNKED again?
Looks like at this juncture, the mainstream media’s recent broadcast/headliner CALL: “The Great Rotation–from Bonds to Stocks” has Commenced and corresponding media-blitz is a BUST. Turns-out, the rotation is from STOCKS TO BONDS instead.
Still going down post close.
From Stocks to Bonds in anticipation of Fed shifting gears…..