FacebookTwitterGoogle+RedditEmail

Grand Theft Wall Street

The Federal Housing Administration (FHA) needs a bailout, but don’t expect the media to tell you why. Instead, they’ll give you some baloney about how the agency was used to “stabilize the housing market” following the government takeover of mortgage giants Fannie Mae and Freddie Mac in September of ’08. While there’s some truth to this, it misses the larger point, which is that FHA was used to generate as many toxic mortgages as possible to keep the money flowing into the big Wall Street banks and to prevent housing prices from plunging even further leaving bank balance sheets deeper in the red. That’s what really happened; the FHA was looted to save the banks. It’s another example of grand theft Wall Street. Now take a look at this from Bussinessweek:

“The agency’s financial report last year projected that loans issued before 2009 would result in $26 billion in losses, $14 billion of that from a subset of loans in which sellers were allowed to cover the down payment on behalf of the buyer, often by inflating the price of the house. Congress banned seller-funded down payment loans beginning in 2009.

Still, the risk of many of those mortgages has been transferred to the agency’s more recent books of business because they have been refinanced under FHA’s streamline program, which waives many underwriting requirements to enable borrowers to take advantage of low interest rates. More than 17 percent of all FHA loans were delinquent in September.” (“FHA Said to Set Stage for Treasury Draw as Losses Mount”, Businessweek)

$26 billion here, $26 billion there; pretty soon you’re talking real money.

Explain to me why would anyone in their right mind would allow the seller to pay the down payment? A down payment is intended to prove that the loan applicant is capable of saving money which is a traditional way of determining creditworthiness. Letting the seller put up the down-payment turns the entire process on its head. It’s completely self defeating. It just shows the extent to which the FHA was bending the rules to prop up housing prices to accommodate their Wall Street overlords.

And did you catch that bit about “More than 17 percent of all FHA loans being delinquent in September?” That’s just more proof of fraud, isn’t it? Typically, banks only see delinquency rates of about 1 or 2 percent. The only way you get 17 percent delinquency rate is you’re grabbing people off the streets and signing them up for 30-year loans without checking their credit history. It’s such an obvious scam, it’s laughable. I assure you, even a cursory investigation of loan applications during this period would expose widespread fraud in the mortgage origination process. But, of course, we don’t do criminal investigations anymore because –as Mr Obama says, “I want to look forward, not backward.”

Of course no one in the media would dare to suggest that the FHA was involved in a vast criminal conspiracy to rip off taxpayers. Heaven forbid! But that’s what it amounts to when you issue mortgages to people who YOU KNOW will never be able to repay the debt. It’s premeditated robbery. The FHA was allowing the banks to report record profits and take hefty bonuses on loans that they knew would eventually blow up and be charged to taxpayers. The media calls that “stabilizing the housing market”. I call it raping the public.

Is that too harsh? Maybe there are some skeptics reading this who think that the folks who were in charge at the time (Treasury Secretary Henry Paulson and Fed chairman Ben Bernanke) were doing the best they could under very difficult circumstances? Maybe they think that using FHA to guarantee junk mortgages was the only way to keep the ailing housing market on life support, after all, the country was in the throes of the worst financial crisis since the Great Depression, wasn’t it?

Sure, it was, but that’s what makes the FHA swindle so grotesque, because even in the middle of an economic meltdown, the people in charge only pursued the policies that further enriched their thieving friends. In order to prove that point, we only need to browse the archive at Bussinessweek, where a 2008 article titled “FHA-Backed Loans: The New Subprime”, lays out the basic facts in black and white. Here’s an excerpt:

“The same people whose reckless practices triggered the global financial crisis are onto a similar scheme that could cost taxpayers tons more
As if they haven’t done enough damage. Thousands of subprime mortgage lenders and brokers—many of them the very sorts of firms that helped create the current financial crisis—are going strong. Their new strategy: taking advantage of a long-standing federal program designed to encourage homeownership by insuring mortgages for buyers of modest means.

You read that correctly. Some of the same people who propelled us toward the housing market calamity are now seeking to profit by exploiting billions in federally insured mortgages. Washington, meanwhile, has vastly expanded the availability of such taxpayer-backed loans as part of the emergency campaign to rescue the country’s swooning economy.

For generations, these loans, backed by the Federal Housing Administration, have offered working-class families a legitimate means to purchase their own homes. But now there’s a severe danger that aggressive lenders and brokers schooled in the rash ways of the subprime industry will overwhelm the FHA with loans for people unlikely to make their payments. Exacerbating matters, FHA officials seem oblivious to what’s happening—or incapable of stopping it. They’re giving mortgage firms licenses to dole out 100%-insured loans despite lender records blotted by state sanctions, bankruptcy filings, civil lawsuits, and even criminal convictions.

As a result, the nation could soon suffer a fresh wave of defaults and foreclosures, with Washington obliged to respond with yet another gargantuan bailout. Inside Mortgage Finance, a research and newsletter firm in Bethesda, Md., estimates that over the next five years fresh loans backed by the FHA that go sour will cost taxpayers $100 billion or more. That’s on top of the $700 billion financial-system rescue Congress has already approved. Gary E. Lacefield, a former federal mortgage investigator who now runs Risk Mitigation Group, a consultancy in Arlington, Tex., predicts: “Within the next 12 to 18 months, there is going to be FHA-insurance Armageddon.” (“FHA-Backed Loans: The New Subprime”, Businessweek)

How do you like that? And that was written back in November 2008, so a lot of people knew what was going on even then. Our point is that the FHA was NOT used to “stabilize the housing market”, that’s complete industry-fabricated PR hogwash. It was used to turbo-charge asset prices and to shovel more money to crooked bankers. Here’s more on the story from CNBC’s Realty Check:

“The FHA losses stem from business it did between 2007 and 2009, when the rest of the mortgage market retreated dramatically. $70 billion in claims are attributable to just those three years when seller-funded downpayment assistance was still allowed. That was prohibited in 2009.

The FHA, which requires just 3.5 percent down payment on a loan and which had lower relative credit score requirements, went from just 2 percent of the market during the height of the housing boom to nearly 40 percent at the height of the crash, insuring $330 billion worth of mortgages in 2009 alone.” (“To Stem Losses, FHA Mortgages Get More Expensive”, CNBC)

Same old, same old, right? The FHA rubber stamped hundreds of billions in mortgages even though they knew the underwriting was shoddy and that the losses would eventually be dumped on Uncle Sam. And who was the primary regulator when all this hanky panky was going on?

Why, none other than Ben Bernanke. The very same Ben Bernanke who just last week said we need to loosen lending standards so the banks can issue more bad loans. It’s true. Check out this clip from a speech that the Fed chairman gave last week in Atlanta:

“It seems likely at this point that the pendulum has swung too far the other way, and that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery…” (“Challenges in Housing and Mortgage Markets”, Federal Reserve)

Sure, let’s return the Golden Era of Crappy Lending circa 2006. Let’s get those subprime boiler rooms up-and-running again so we can blow the system to Kingdom Come one more time. Can you believe this man is still Fed chairman?

Congress should ignore Bernanke’s blabbering and standardize mortgage applications requiring 10 percent down, proof of employment, and minimum 620 credit scores. These should be the ironclad rules of lending from which the banks may not veer one iota from or face criminal penalties and a revoking of their license. Enough of the bubbles, already!

According to a recent audit, the FHA has a $16.3 billion deficit, which doesn’t sound too bad considering that agency has grown by 30 percent since 2009 and presently insures $1.1 trillion in mortgages. But then if you read the fine-print, you discover that–just this year–the agency “introduced the claim-type prediction model to separate REO claims and pre-foreclosure claims”.

What does that mean? It means they’re fudging the numbers to make things look rosier than they really are. The fact is, this is just Phase 1 of multi-phase bailout that could run into hundreds of billions of dollars, mainly because the FHA is STILL slapping its seal of approval on high-risk loans. Just get a load of this clip from The Atlantic:

“Today, the agency is still targeting low-income borrowers, pushing them into mortgages with ruinous consequences. For example, in the first quarter of FY 2012, an estimated 40 percent of FHA’s business consists of loans with either one or two subprime attributes — a FICO score below 660 or a debt ratio greater than or equal to 50 percent. These subprime loans are overwhelmingly risk layered with a loan to value ratio (excluding financed mortgage insurance premium) of equal to or greater than 95 percent and a loan term of 30 years.

As these delinquencies from 2008-2010 turn into foreclosures — a kind of post-bubble second wave — they’ll put downward price pressure on already-battered neighborhoods, and the nascent housing recovery could quickly reverse course, dragging the economy.” (“The Next Housing Bailout? Big Trouble Brewing at the FHA”, The Atlantic)

Can you see what’s going on here? The banks can’t make money by lending because too many people are still broke from the housing bubble and aren’t interested in borrowing more money. So they’ve focused on weasaling the government instead, using their agents inside the system to pull the right levers so more public money is diverted to Wall Street. And it’s all done via bad loans, that’s the strategy in a nutshell. Once they get the government to underwrite their garbage mortgages, they crank out as much funny money (credit) as possible and dump the bill on John Q. Public. So far, the plan has worked like a charm, and it will probably continue to work for some time to come. After all, who’s going to stop them? Obama?

Don’t make me laugh.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

More articles by:

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

November 12, 2018
Kerron Ó Luain
Poppy Fascism and the English Education System
Conn Hallinan
Nuclear Treaties: Unwrapping Armageddon
Robert Hunziker
Tropical Trump Declares War on Amazonia
John W. Whitehead
Badge of Shame: the Government’s War on Military Veterans
Will Griffin
Military “Service” Serves the Ruling Class
John Eskow
Harold Pinter’s America: Hard Truths and Easy Targets
Rob Okun
Activists Looking Beyond Midterm Elections
Binoy Kampmark
Mid-Term Divisions: The Trump Take
Dean Baker
Short-Term Health Insurance Plans Destroy Insurance Pools
George Wuerthner
Saving the Buffalohorn/Porcupine: the Lamar Valley of the Gallatin Range
Patrick Howlett-Martin
A Note on the Paris Peace Forum
Joseph G. Ramsey
Does America Have a “Gun Problem”…Or a White Supremacy Capitalist Empire Problem?
Weekend Edition
November 09, 2018
Friday - Sunday
Louis Proyect
Why Democrats Are So Okay With Losing
Andrew Levine
What Now?
Jeffrey St. Clair
Roaming Charges: Chuck and Nancy’s House of Cards
Brian Cloughley
The Malevolent Hypocrisy of Selective Sanctions
Marc Levy
Welcome, Class of ‘70
David Archuleta Jr.
Facebook Allows Governments to Decide What to Censor
Evaggelos Vallianatos
The Zika Scare: a Political and Commercial Maneuver of the Chemical Poisons Industry
Nick Pemberton
When It Comes To Stone Throwing, Democrats Live In A Glass House
Ron Jacobs
Impeach!
Lawrence Davidson
A Tale of Two Massacres
José Tirado
A World Off Balance
Jonah Raskin
Something Has Gone Very Wrong: An Interview With Ecuadoran Author Gabriela Alemán
J.P. Linstroth
Myths on Race and Invasion of the ‘Caravan Horde’
Dean Baker
Good News, the Stock Market is Plunging: Thoughts on Wealth
David Rosen
It’s Time to Decriminalize Sex Work
Dan Glazebrook
US Calls for a Yemen Ceasefire is a Cynical Piece of Political Theatre
Jérôme Duval
Forced Marriage Between Argentina and the IMF Turns into a Fiasco
Jill Richardson
Getting Past Gingrich
Dave Lindorff
Not a Blue Wave, But Perhaps a Foreshock
Martha Rosenberg
Dangerous, Expensive Drugs Aggressively Pushed? You Have These Medical Conflicts of Interest to Thank
Will Solomon
Not Much of a Wave
Nicolas J S Davies
Why Yemeni War Deaths are Five Times Higher Than You’ve Been Led to Believe
Jim Goodman
We call BS! Now, Will You Please Get Over This Partisanship?
Josh Hoxie
How Aristocracies are Born
Faisal Khan
The Weaponization of Social Media
James Munson
The Left Has Better Things to Do Than Watch Liberals Scratch Their Heads
Kenneth Culton
The Political Is Personal
Graham Peebles
Fracking in the UK
Alycee Lane
The Colonial Logic of Geoengineering’s “Last Resort”
Kevin Basl
How Veterans Changed the Military and Rebuilt the Middle Class
Thomas Knapp
Election 2018: The More Things Don’t Change, the More They Stay the Same
Gary Leupp
Europe and Secondary Iran Sanctions: Where Do We Go Now?
Saurav Sarkar
An Honest Look at Poverty in the Heartland
FacebookTwitterGoogle+RedditEmail