Bernanke's Double-Whammy
The Foreclosure-to-Rental Screwjob
by MIKE WHITNEY
Federal Reserve chairman Ben Bernanke wants US taxpayers to purchase more of the garbage loans and mortgage-backed securities (MBS) that the big banks still have on their books. (Cash for trash) That’s the impetus behind the Fed’s 26-page white paper that was delivered to Congress last Wednesday. The document outlines the Fed’s plan for ‘stabilizing the housing market’, which is a phrase that Bernanke employs when he wants to provide more buy-backs, giveaways, subsidies and other corporate welfare to big finance.
“Restoring the health of the housing market is a necessary part of a broader strategy for economic recovery,” Bernanke opined in a letter to the Senate Banking and House Financial Services committees.
Indeed. The housing depression continues into its 5th year with no end in sight, mainly because the people who created the crisis are still in positions of power. And, they’re still offering the same remedies, too, like handing the banks another blank check to save them from losses on their bad bets. That’s what this new “housing stabilization” boondoggle is really all about, bailing out the bankers. Here’s a summary from Bloomberg:
“Bernanke’s Fed study said “more might be done,” including eliminating entirely the reduced fees for risky loans, “more comprehensively” cutting lenders’ put-back risks; and further streamlining refinancing for other Fannie Mae and Freddie Mac borrowers. The U.S. also should consider having Fannie Mae and Freddie Mac refinance loans not already backed by the government, which would add credit risk for the companies, according to the report….” (Bloomberg)
First of all, Fannie and Freddie only return loans (“put-backs”) that don’t meet their standards and which the banks foisted on them so they wouldn’t have to face the losses. The idea that the publicly-funded GSE’s should just “eat the losses” is ridiculous.
And, why–in heaven’s name–would congress want to take on more risk when they can keep millions of people in their homes by simply reducing the principle on their mortgages to the present value of the house? (aka–”Cramdowns”) Naturally, the losses would have to be absorbed by the banks who – by everyone’s admission – were responsible for the present crisis due to their lax lending standards and, oftentimes, fraudulent behavior. This would lead to a restructuring of the country’s biggest banks through a Resolution Trust Corporation (RTC) so their toxic assets and backlog of foreclosed properties can be auctioned off as soon as possible.
This is a straightforward way to fix the housing market and it should have been done long ago. Bernanke’s solution is not only unreasonable, it’s also deceitful. Here’s more from the Fed’s paper: “Continued weakness in the housing market poses a significant barrier to a more vigorous economic recovery”..(without action)…“the adjustment process will take longer and incur more deadweight losses, pushing house prices lower and thereby prolonging the downward pressure on the wealth of current homeowners and the resultant drag on the economy at large.”
Did it really take Bernanke 5 years to figure out that housing is a “drag on the economy”?
No, of course not. So, what’s going on now that has suddenly spurred him to act?
Well, for one thing, the banks are losing a great deal of money on the mortgage-backed securities (MBS) that they bought in the last few years. Here’s the story in the Wall Street Journal:
“After flickering to life early in 2011, the market for subprime- and other risky residential-mortgage bonds has returned to its comatose state. And many investors believe a revival could be years away.
Prices on some bonds, which are backed by mortgages that don’t meet the standards needed to get backing from government-controlled companies like Fannie Mae and Freddie Mac, plummeted as much as 30% last year. The ABX, an index that tracks the value of subprime bonds, ended the year at 43.44 cents on the dollar, down from 59.90 cents at year-end 2010 and a peak of 62.68 cents in February 2011
While that decline pushed yields up to as much as 17% — bond yields rise as prices fall — many fund managers have pulled out of the market due to worries about further price declines. Moreover, repeated downgrades have left too few investment-grade securities for them to own. Wall Street banks, which traditionally have played a key role in the market matching buyers and sellers, are backing away ahead of new regulations that will make it more expensive to hold riskier assets.” (Investors Sour on Subprime Bonds, WSJ)
So, Wall Street’s financial geniuses got back into the MBS-biz (for a second time) and got whacked again? That’s right; and now they want John Q. Public to pay for it with another bailout.
And, there’s more to this story, too. European banks own roughly $100 billion of these mortgage-backed turkeys which they’re presently shedding like crazy in order to meet new capital requirements. That means US bank balance sheets are dripping red as the value of their financial asset-stockpile continues to plunge. That’s why Sugar Daddy Bernanke has stepped in, because it’s time for another multi-billion dollar bank rescue.
Look, the Fed has already purchased over $1.25 trillion of these toxic MBS which represents humongous long-term losses for the taxpayer. Do we really need more of this sludge?
Bernanke promised that the first round of quantitative easing (QE1) would boost employment (It hasn’t) and improve housing sales (it never happened) The only uptick in sales occurred because the colluding banks deliberately reduced the supply of foreclosed homes they put on the market. The reduction has led to a massive 1.7 million backlog of housing units (shadow inventory) that will eventually be dumped onto the market triggering another sharp decline in housing prices. Bernanke wants to do something about the bulging inventory as well as prop up the value of sagging MBS. So, the Fed’s plan actually has two main objectives; in other words, it’s the double whammy. Here’s more from Bloomberg:
“Since the Fed started buying $1.25 trillion of mortgage bonds in January 2009, the value of U.S. housing has fallen 4.1 percent, and is down 32 percent from its 2006 peak, according to an S&P/Case-Shiller index. The central bank is poised to buy about $200 billion this year, or more than 20 percent of new loans, as it reinvests debt that’s being paid off. Some Fed officials have said they may support additional purchases that Barclays Capital estimates could total as much as $750 billion.”
Did you catch that? Taxpayers are going to get slammed for another $750 billion. That’s nearly as much as Obama’s American Recovery and Reinvestment Act (ARRA), the fiscal stimulus that added 2 percent to GDP and kept unemployment from rocketing to 13 percent. Bernanke wants to throw that same amount down a Wall Street sinkhole.
So maybe you think this won’t happen, after all, could Congress really be so gullible as to fall for Bernanke’s fearmongering flim-flam again?
Maybe and maybe not. But there are some pretty wealthy and well-connected people who are betting that the Fed will do as it’s told and pave the way for another hefty bailout. In fact, the world’s largest bond fund (Pimco) has stumped up a mountain of cash betting that good buddy Bernanke will get the printing presses whirring sometime in mid-January. Here’s the story from Zero Hedge:
”….in December the fund (Total Return Fund or TRF) doubled down on its QE3 all in bet, by “borrowing” even more cash, or a record $78 billion, using the proceeds to buy even more MBS, as well as Treasurys, which hit a combined 31% of the TRF’s holdings. In other words, between MBS and USTs, Pimco holds a whopping 79% of total, mostly in very long duration exposure. In fact, this combination of long duration and pre-QE exposure has not been seen at PIMCO since late 2008, early 2009, meaning that as many banks have been suggesting, (Bill) Gross is convinced that the Fed will announce if not outright QE3 this January, then at least intimate it is coming.”(“Pimco Doubles Down On All In Bet Fed Will Monetize MBS”, Zero Hedge)
So what does Pimco know that we don’t know? More importantly, from whom are they getting their information?
And, there’s another thing, too. This whole deal about converting foreclosed homes into rental properties is another scam. Here’s the scoop from another article in the Wall Street Journal:
“The paper also signaled that the Fed…. will try to involve banks more directly in housing-revival approaches… One area involves efforts to turn foreclosed homes into rental properties….
Banking regulations typically direct banks to sell foreclosed homes quickly, although the rules do recognize this isn’t always practical and so these properties can be held up to five years. The Fed said it is now “contemplating issuing guidance” to banks and regulators that would possibly allow banks to turn some of these foreclosed homes into rental properties…..The hope is this may help stanch the flow of foreclosed properties into markets…” (“Fed Up With the Depressed State of Housing”, Wall Street Journal)
Bingo. The banks are not only sitting on 1.7 million shadow inventory of homes they’ve stockpiled to keep prices artificially high. They also have millions more in the pipeline when a settlement is finally reached on the robo-signing scandal. So, what are they going to do with all that backlog?
That’s easy. They’ll schluff it off on the taxpayer by creating a foreclosure-to-rental swindle where the government provides lavish incentives for banks and private equity scavengers to buy the homes (in bulk) for pennies on the dollar with loans provided by–you guessed it–Uncle Sam. Here’s a summary of what’s going on behind the scenes:
“As the Obama administration and federal regulators work on a program to sell government-owned foreclosures in bulk to investors, those investors aren’t wasting any time stockpiling cash and buying foreclosed properties at auction and from the major banks.
Oakland, California-based Waypoint Real Estate Group, a major acquirer of so-called “REO to Rental” (Real Estate Owned) just announced a partnership with a private equity firm, Menlo Park, California-based GI Partners, to buy foreclosed properties….
“Our approach to buying distressed single-family houses, renovating them, and leasing to residents who are committed to a path to future home ownership is a viable solution to our nation’s housing crisis,” said Colin Wiel, managing director and co-founder of Waypoint in a press release. “Our partnership with GI Partners ensures we can take the next step in our company’s evolution.”
GI is taking an increasingly popular bet on distressed real estate, closing on a $400 million fund with Waypoint, which has plans to purchase $1 billion in distressed real estate assets over the next two years, according to its release. (“Private Equity Readying a Run on Foreclosures”, Diana Olick, CNBC)
So, what do these guys know that we don’t know? And why are they plunking down big money when the details have not even been released yet?
None of this really passes the smell test, does it? The only thing we know for sure is that the “fix is in” and that Bernanke will do what he always does when the banks are in a pinch. Throw them a lifeline.
MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion, forthcoming from AK Press. He can be reached at fergiewhitney@msn.com
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