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Banking Porn / eXiled Alert! / June 16, 2009
By Yasha Levine

The whole racket is so crude and so obviously doomed to end in disaster that papers like the Wall Street Journal, normally a champion of Thatcherite houseowning, have tried to blow the whistle:

The Next Housing Bust

Everyone knows how loose mortgage underwriting led to the go-go days of multitrillion-dollar subprime lending. What isn’t well known is that a parallel subprime market has emerged over the past year — all made possible by the Federal Housing Administration. This also won’t end happily for taxpayers or the housing market.

Last year, banks issued $180 billion of new mortgages insured by the FHA, which means they carry a 100 percent taxpayer guarantee. Many of these have the same characteristics as subprime loans: low down payment requirements, high-risk borrowers, and in many cases, shady mortgage originators. FHA now insures nearly 1 of every 3 new mortgages, up from 2 percent in 2006.

The financial results so far are not as dire as those created by the subprime frenzy of 2004-2007, but taxpayer losses are mounting on its $562 billion portfolio. According to Mortgage Bankers Association data, more than 1 in 8 FHA loans is now delinquent — nearly triple the rate on conventional, non-subprime loan portfolios. Another 7.5 percent of recent FHA loans are in “serious delinquency,” which means at least three months overdue.

The FHA is almost certainly going to need a taxpayer bailout in the months ahead. The only debate is how much it will cost. By law, FHA must carry a 2 percent reserve (or a 50-to-1 leverage rate), and it is now 3 percent and falling. Some experts see bailout costs from $50 billion to $100 billion or more, depending on how long the recession lasts.

Private profits, public risk. It is a lurid example of the New Capitalism at work, exposing the cannibalistic nature of our society. Even the institutions created to serve the interests of the public have been perverted into instruments of theft.

Business Week, another conservative financial outlet, was actually warning about the FHA scam back in 2008:

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 percent-insured loans despite lender records blotted by state sanctions, bankruptcy filings, civil lawsuits and even criminal convictions.

More Bad Debt

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, Texas, predicts: “Within the next 12 to 18 months, there is going to be FHA-insurance Armageddon.”

Yet the FHA scam goes on, despite these warnings, for the simple reason that it’s the only thing driving an otherwise moribund real estate market. Without these FHA loans, the whole thing would collapse, sooner rather than later. The Business Week piece was published seven months ago. That leaves five months, more or less, before the Armageddon it predicts.

But for now, this racket — and the couple of trillion dollars pumped into the financial sector — are showing borderline modest results. On average, pending home sales rose by 6.7 percent in April. That’s its highest level since September and the sharpest increase in seven years.

In Victorville, new housing developments are being kept inflated at slightly below 2004 price levels. There has been a slight increase in demand for new homes, too, causing some builders to start raising prices.

A KB Homes development not far from where I live has sold all its lots, raised prices by about 1 percent and even started a new development — smaller, and with less flash, more in sync with the depressed market — that will start selling homes sometime this fall. Even Home Depot said its earnings for the month of May were better than expected.

But if you walk just one block over from the booming Braeburn community, a whole row of homes stands empty. It is a grim reminder of the massive shadow inventory of foreclosed homes no one wants to think about. New-home values are being inflated, but existing homes are becoming increasingly worthless. In bubble cities all across California, real estate has fallen below 1989 levels.

Median Home Prices Drop Below 1989 Levels in Some Parts of Southland

Properties in several areas are selling for less than they did 20 years ago, and that’s not including inflation. Some first-time buyers are nabbing houses for less than what their parents paid.

By Peter Y. Hong

June 10, 2009

In parts of Southern California, the housing crash has upended a basic tenet of the American dream: that home values always increase over the long term.

Properties in several areas are selling for less than they did 20 years ago, and that’s not even counting the effects of inflation.


Add your own

  • 1. Scott Brown  |  June 16th, 2009 at 8:24 am

    Great story, it seems as just more dithering as we move closer to financial collapse. The next step is when millions of homeowners just decide to not make another payment, even if they can afford to.
    The politicians just have to keep lying to us and encouraging everyone to get up early, work a little harder and everything will be all right, since they won’t do anything that can make a real difference to anyone other than their buddies.
    This isn’t a recession or even a depression, this is a national disaster.
    This is a Category 5 economic storm.
    The dikes have broken, the Super Dome is overflowing, people are without food and water–people are desperate and government is doing a GWB style “fly-over” at 40,000 feet.
    We need to keep people in their homes, declare a moratorium on foreclosures, and stop singing in the glee club with all Washington DC’s Wall Street cronies.
    The FHA program is just another phony attempt to send the message that “we have a plan and we are rolling it out,” when in fact the “fly-bye” is the plan.

  • 2. rick  |  June 16th, 2009 at 2:11 pm

    Fuck. I didn’t know about this. Good scoop. It’s the monopoly money phantom-bloat home prices that fundamentally caused the crisis and bailouts, isn’t it? The money never existed. Home-buyers are quanitatively-retarded Americans. The housing bubble has to be allowed to implode.

    According to Taleb, nearly all economic “experts” are utterly full of shit incompetents. He’s not even political about it, which I respect. He’s a convincing guy, too. We live in interesting times!

  • 3. az  |  June 16th, 2009 at 2:15 pm

    Something to think about when reading things like haha.

  • 4. Expat in BY  |  June 16th, 2009 at 2:49 pm

    So if I got it correct, this is what the Consumer Financial Protection Agency is supposed to protect against, and the CFPA is going to come up way late and way short of the mark.

    Probably stating the obvious here, but on the consumer end, it seems like if you didn’t really care about their credit history (or the effect on the overall economy), you could “buy” a home beyond your means, live in it awhile, and then walk away from it when the bills started to get overwhelming.

    I think I’ll stay overseas…

  • 5. Homer Erotic  |  June 16th, 2009 at 3:40 pm

    So where exactly is the State of California getting the money to fund this madness? Aren’t they on the verge of budget collapse?

  • 6. Tommy Strange  |  June 16th, 2009 at 7:43 pm

    Yasha, the overall article was great. It’s an engaging first person educated look at how ‘the experts’ are pushing us to a depression even faster. I just have two problems with what may seem minor points. Though the first is very important, and an example of the lack of education , (economic, class, and racial) that so many americans need. Please consider my post….

    “FHA loans have been around since the Great Depression, helping working-class Americans buy their first homes by providing government insurance that guarantees certain types of loans at no risk to the lender. Until recently, they have been largely a force for good. During the civil rights movement, for example, FHA loans were retooled to help African Americans purchase homes. But like most public programs designed to help the American people, the FHA has been hijacked by big business — in this case, the banking and real estate industries. ”
    Actually the FHA, though on the surface sounds like a good program since the depression, preceded by HOLC, was actually a gov’t funded white only(99%) exodus from the cities and a resultant defunding of the cities via lost tax base and to make a white working class feeling ‘middle class’ who would never then vote for rebuilding cities, and the precursor to the housing bubble we have now. The environmental aspects of such foolish funding I won’t go into to. But FHA loans from FDR up until the late 60’s were predicated on suburban development almost exclusively to not only benefit corporations that were rightfully fearful (from their perspective of unions finally allowing blacks in), in the cities,and huge real estate developers benefiting from highway construction. The FHA from the beginning has been FOR the banking and FIRE sector. Blacks and Jews were not allowed these loans. It was not a conspiracy. It was very upfront. There were rates of A to D of every urban area in the country made under FDR…and this continued up into the 60’s. IF you wanted to re do your ‘urban house’, or ‘move up’ across the street, but had blacks on your block, no loan…UNLESS you would move to a suburb.And lets repeat. Black families did not get these loans until the late 60’s. That’s 25 years of white only suburbanization, with the concomitant union racism, housing segregation and political and economic disenfranchisement that existed.
    If you actually wanted to stay in an urban area, and you were white, but ONE black and ONE jewish family lived there , you get a low rating and have to move to the suburbs for a loan.If you read the commits of politicians during these times, you will see it was a very stated tactic to segregate people of color and give whites wealth, and a stake in siding with increased segregated class and race real estate development.Mike Davis portrays this in two of his best books.

    this is well documented in many urban studies texts, and on many blogs, and in many articles. Two essential books, even used in many university courses are “Crabgrass Frontier” by jackson and “Urban Crisis: Postwar Detroit” by sugree.

    The other comment you made , is a minor bug up my butt…
    “The second contraction will come, and when it does, it’ll be bigger and badder than ever. And the government bailout will come straight out of our pensions and health care.”

    You must be upper middle class to make such a statement. Not that is a bad thing. Certainly looking at your humanist writing wouldn’t make me think so. But the bottom half of this country does not have pensions(!) nor much health care. Think about that. You wrote about worrying about pensions in an article attacking the investment class, when half the population in the richest country in the world does not even know what the fuck a pension even is. The boot is hitting the working class hard already.Even in ‘progressive’ San Francisco, thousands of nurses and social workers and etc have been cut, while they increase regressive taxes. Near 6,000 needy and addicts may lose support in one clinic alone.And as hundreds of thousands of foreclosed unemployed come into the cities for help? The same people that thought they were so special living in cul de sacs and suburban homes, that voted for more prisons, more tax cutting, more FHA type morgtage subsidizing while manufacturing was outsourced?
    I am hardly worrying about your pensions.

    good article though. Please reply. i am putting out a free newspaper in SF and will except part of your article.
    A dialogue would be great.

  • 7. Tommy Strange  |  June 16th, 2009 at 7:57 pm

    “except part of your article”.

    sorry I mean ‘excerpt’. I meant quote. cuz it is a great article!!!!

  • 8. mmmm  |  June 17th, 2009 at 12:04 am

    Wow, I really wish there was some way to divorce middle and lower-income Americans from their ubiquitous homer-ownership fetish.

    Get people into largish, even luxurious apartments/flats and get the requisite car ownership out of the equation (they do rent those things, you know) and all of a sudden, people aren’t so cash poor anymore…

    …but I understand this is a batshit, lunatic fringe position. We’re just going to have to meekly accept and brace for the next big contraction, because simply stepping out of the way would be *crazy*! I mean, honestly, no house? Our broke-ass friends would all laugh at us! Mommy and daddy would disapprove!

  • 9. Mark  |  June 17th, 2009 at 5:07 am

    Yeah, middle class people have an unkillable house fetish. When I hung around with upper-middle class people, I was under no pressure to own a house. They were always doing things outside their houses. Then when I got my middle-class girlfriend, it was house house house house house….

  • 10. az  |  June 17th, 2009 at 7:56 am

    @8: That’s what those on the so called ‘loony left’ apparently want to do. I remember reading a Freeper discussion of how Tysons Corner in Northern VA is going to be turned into a mixed-use area instead of being an enormous parking lot the government can’t afford anymore and that apparently what is actually going on is that the liberals want to put everyone into cattle cars to live in ghettoes. Otherwise read Tommy’s comment.

  • 11. Chris  |  June 17th, 2009 at 11:53 am

    That’s great Yasha.

    BTW, where the fuck is War Nerd on Iran?

    I’m pissed and I’m like Francis Bacon: I would like to suck his cock.

  • 12. Simon  |  June 17th, 2009 at 3:38 pm

    To pay off the existing debt, new debtors have to be found, that is the way the money and banking system works. Problem is we have run out of new people prepared to take on more debt and existing debtors have had enough. Time to create debt free money, not allow the banks to create yet more debt money.

  • 13. az  |  June 18th, 2009 at 12:54 pm

    Simon: This has happened since before capitalism even existed and money was just a weight of precious metal. People work for a wage, need money before they get the wage, spend it, get the wage, repay the debt with interest, take out another debt as they have no money again, etc. The lender-debtor employment system eventually collapsed because the debtors were financially ruined and could no longer afford to buy the goods they made for the lender, from the lender. This led to the systems of slavery we know of so well in the age of antiquity. What’s different today is that slavery and serfdom are outdated systems and while employment is the latest and most efficient one, it has also befallen the fate of falling profits and the introduction of credit to make up for that. Except credit is tied to capital both when it is given out and when it’s spent.

  • 14. az  |  June 18th, 2009 at 12:55 pm

    Or just read the chapters on money and banking in Capital by Marx, it’s all right there.

  • 15. Dammerung  |  June 18th, 2009 at 6:51 pm

    Yasha Levine for Secretary of the Treasury and Peter Schiff for Chairman of the Federal Reserve. The government is killing the goose that laid the golden egg – US! THE TAXPAYERS!

  • 16. Frank McG  |  June 25th, 2009 at 3:17 am

    I think I need to go watch Glengarry Glenn Ross again.

  • 17. Mike Gogulski  |  July 19th, 2009 at 11:58 am

    Nothing surprises me anymore.

    America, fuck yeah (faceplant in peanuts and beer detritus on bar)

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