We've been told we can't afford to bail out flailing homebuyers. Truth is, government instead choose to bail out paper titles to those same houses at the same high cost. by Gene DeNardo
(libertarian)
Thursday, August 26, 2010
"I don't worry about a thing, because I know nothing is going to be allright!" Mose Allison
Fannie Mae and Freddie Mac have financial problems. They have asked for billions more from the taxpayer and it is estimated that they may be dealing with 200 billion worth of bad debt. Other estimates are much higher, up to five times. Despite this, they are paying the Treasury, their owner, dividends. Where do you think the dividend came from?
What are they doing with the money? What exactly is it they do anyway?
While they are touted by their devotees, primarily those politicians who receive large campaign contributions from them [the past tense may be in order here since public takeover], as the savior of the homebuyer, they really carry on a task that is the polar opposite. They preserve the investment of the mortgage investor when the stressed mortgage holder loses his home to the bank. And, they do this for the same amount of money it would cost to bail out every foreclosed former homebuyer that has a Fannie or Freddie mortgage {over 50% of all mortgages}and put them back in their home. This is true because we are talking about different versions of the same piece of paper, the title to foreclosed homes.
Before you write this off as another socialistic plot to right all the naive or stupid economic mistakes average people make, listen up. What I am exposing is exactly what you fear: a socialistic plot to right the not so naive but still stupid mistakes not so average people make; bankers and investors.
Fanny and Freddie purchase mortgages from banks and lenders. They then wrap a bunch of them up in nice packages, guarantee "full payment of principle and interest" and then sell them to investors or trade them back to lenders as Mortgage Backed Securities. The same home mortgage, whose fulfillment remains the full responsibility and risk of the home buyer is returned to the investor or back to the lender as a risk free investment guaranteed by Fannie or Freddie and implicitly backed {now firmly backed} by the federal government. Nice, eh?
So, if a bundle of one hundred mortgages have five or ten that are being foreclosed on {the current rate of foreclosures within their accounts is @5%}, Fannie and Freddie step in and pay the difference between what has been paid on the particular mortgage and what is owed. To the investor, nothing at all has occurred. His investment is paying out exactly as it was originally penciled out to pay. He is getting a sweet return on a zero risk investment.
During all this, folks that have mortgages within the MBS are losing their homes because they can't meet the obligations of their mortgage contracts. No slack there, simply the workings of the market.
Interesting enough, what Fannie and Freddie, or we should say the US Treasury {79.9% ownership}, pay out to investors who are blessed by the state with a zero risk sure fire investment is the same amount that the soon to be without a home homebuyer needs to stay in their house. After all, we are talking about the same house from two distinctly different angles. The liability of the homebuyer is the asset of the MBS investor.
One side is held to the terms of their mortgages by the banks, backed by the force of the state. In the case of default, the homebuyer, in a timely manner prescribe by the statutes is pitched out onto the streets. The other side, those holding the "paper" to those same mortgages, is guaranteed their investment by the force of that same government and thanks to the generosity of the taxpayer will receive complete payment on the original value of the mortgage.
Remember, we can't afford to bail out the people facing foreclosure. It would cost too much and we are in terrible financial condition as a nation. Yet, we can afford to bail out the investor, who owns the other end of the same paper title. The interesting point is that if we also bailed out the homebuyer, we would be bailing out the same mortgage twice, once to the buyer and once to the paper holder. Take your seats, because there is also talk circulating of bailing out Fannie and Freddie's stockholders.
Obviously this is a form of socialism. But, it isn't the real concrete socialism that occurs in those nasty Marxist leaning countries that eventually collapse under their own weight. The Soviets would have "appropriated" the actual "brick and mortar" house that the comrade lives in. They would make sure their "worker" had a ramshackle roof over his head. They would declare all the actual machines in the auto factory the property of the state and man them with those same workers and go on to produce a car far worse than anything Detroit could dream up.. They would make no bones about who owned what. The paper is of little importance to a State Communist.
But, we have "free enterprise". Our government doesn't back the actual house; it backs the "paper". We back the investor or the bank that owns the title to the house, insuring that they will never lose title and by some whim of a freer market fall into the hands of those who actually might live in it, if only a free competitive price might reflect a realistic value of the property.
And, we do it time and time again. We don't back the actual banks and investment firms; we again back those who hold title to the myriad "securities" that are created as profit machines by these banks and firms. When their ridiculous schemes don't pan out, we step in with real hard cash siphoned from those of us who are still working real hard jobs and pay out these schemes to those who hold title to them; as if the terms within these securities actually made some sort of real economic sense that might be deemed worthy of fulfillment.
When one of our "big three" continues to make the wrong cars at the wrong time for the wrong price, the Treasury doesn't declare the plant state property. Instead, our government backs up the "investment" of the plant. It dumps billions into the hands of those who hold title to the buildings, machines and distribution system that the auto industry represents. We know that even though they just screwed up big time, that they are the ones who know how to use the welfare dollar better than we do.
Insurance, obviously, is an industry built on owning title to risk. It only makes sense that our government would step in when it comes to insurance. If it is paper we are backing rather than concrete product, and the government's economic function is to prevent those who hold paper title to risky enterprises from actually experiencing risk that regularly occurs in the real world, then the AIG bailout is a given. It is important to be consistent.
In a strange sense, the entire monetary system is built upon claiming title to what others produce. What is the Federal Reserve debt currency system but the creation of new debt in order to extract value from what has already been produced by the productive sector of the economy? The debt money may be created out of "thin air", but the currency certainly doesn't get its value from air.
And, that is all the Fannie and Freddie debacle is, an exercise in consistency; the consistency of subsidizing the "ownership" of paper title. The "implicit guarantee" of the federal government that those privileged or fortunate enough to own what others use will never face the actual risk of ownership: insuring reward without risk.
The fact that folks are losing their homes is a given. They invested in false value, a value that seemed to be there but really wasn't. As much as we would like them to be secure in their homes, there is nothing we can do about that. That is "free enterprise".
But, we can and we will, with the ever present guidance and force of our government, do something about that same false value for those who own paper title to these same "toxic" houses. We, being Americans, want these poor investor folks to be secure in their securities. We will preserve the highest possible monetary value these securities may gain for their investors and paper owners right to the very end, even if it takes everything we have. And, it just may.
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Posted By: rtaylortitle
Date: August 31, 2010 12:24:01 PM
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After 34 years, I retired from the title insurance industry. Being both an Escrow Officer ("closer") and owner, I've witnessed thousands of closings, and I would like to convey a few impressions these experiences have left me with.
First, most Purchasers under a sale and Borrowers under a refinance fall into two camps: (1) Those who actually read their closing docs and (2) Those who do not.
Those who opt NOT to read usually have just a few questions, to-wit: What is the purchase price on the HUD Statement (if a sale) and what is the loan amount; followed by what is the interest rate and/or A.P.R. on the T.I.L. (Truth-in-Lending form); followed by how much is my monthly payment (with or without escrow impound acct.); finalized by when is my first payment due? Many would ask only how much is my payment and when is it due?
I would usually explain briefly other matters that SHOULD interest them such as any Due-on-Sale clause (which all conventional loans demand) and IF the Note and Deed of Trust (mortgage) has a Balloon feature or is an A.R.M. (adjustable rate note). If it is an ARM loan, what Index is it based on and when does the conversion date occur (from a fixed to an ARM).
Of course there are and were many variables, but a closer basically is NOT a policeman nor necessarily an attorney and it is not the job of the closer to give advice or an opinion. It is the closer's responsibility to have a "correct" HUD Statement with all the incumbent charges and credits associated with the closing.
The point I want to make is that there is a tendency for those Purchasers and/or Borrowers who obtain mortgages at a HIGHER rate that others (either because there credit score was lower and/or their "ratios" of income to debt were not as favorable) to ask fewer questions and really be concerned about what happens if they default of the note. It is my conclusion, as well, that those Purchasers/Borrowers with the least educational background tend to be negligent in comprehending the pitfalls of a default.
I place much of the blame for this on the mortgage lenders (especially mortgage brokers) who simply are playing the numbers game of closing as many deals as possible. Am I contending that they are being, as liberals and progressives enjoy stating, predatory? No, I'm not saying that. I am saying that I believe there should be a one page form in raised lettering and in very bold, glaring print that the prospective Purchaser/Borrower should see prior to any other loan application documents that states words to the effect as "IF YOU QUALIFY FOR THIS LOAN AND CLOSE THIS TRANSACTION YOU MAY, IN THE EVENT OF DEFAULT, LOSE YOUR HOME AND LOWER YOUR CREDIT SCORE---DO YOU UNDERSTAND THIS STATEMENT?"
If Purchasers/Borrowers chose to ignore the warnings, they have no one to blame but themselves. Don't go running to a media source claiming you were a victim of "predatory" lending...you, instead, may have been a predatory Borrower!!
