The Mortgage Money Machine
Ilargi
 Turns out, Timothy "Disaster" Geithner has a list of 4 friends that take up a very large segment of his time on the phone. They're the CEO’s of Goldman Sachs and JPMorgan Chase, as well as both the Chairman and the CEO at Citigroup. Apparently, these 4 men are his only close friends. Reading through the AP report on Geithner's appointment calendars, you get the distinct impression that the US Treasury Secretary stops just -but only just- short of putting the president on hold when he calls. Members of Congress are not that lucky.
What does Geithner talk about with his buddies-of-yore? Well, one thing we know they must have discussed a lot is how to make sure the Federal Reserve and Geithner's own Treasury could shove $1.2 trillion into the housing market, as reported by the Federal Housing Finance Agency, mainly through Fannie Mae and Freddie Mac, but increasingly also through the FHA and Ginnie Mae. FHFA acting director Edward DeMarco claims there's $750 billion more (!) "available if necessary" for the same purpose.
The [Federal reserve] has paid $885 billion for mortgage securities, most of them issued by Fannie or Freddie, and also has given the GSEs $131 billion to buy up their debt obligations. DeMarco called these infusions a "considerable backstop" and said they empowered the firms to play "a critical role in bringing some measure of liquidity to the mortgage market.
Of course, most of this money flows towards the biggest mortgage lenders, which apart from Geithner's speed-dial cronies include the likes of Bank of America, which is, if they know what's good for them, looking, as we speak, for a new CEO who's close to Geithner, to replace Ken Lewis who was not, and Wells Fargo, the remaining giant mortgage lender in the field. That should about cover it.
Still, at least part of the almost $2 trillion is also used by Fannie and Freddie to prop up independent mortgage banks , by committing in advance to buying up any loans that "meet certain standards". What is achieved by this is an ongoing semblance of a free market. And as long as the taxpayer pays for and guarantees that semblance, that's fine with the big boys.
The independent banks that are artificially kept alive through these programs have found ways to add to their stroke of luck.
- The Mortgage Bankers Association recently announced that independent mortgage lenders made an average profit of about $1,100 per loan originated in the first quarter of the year, an astonishing 635 percent increase from the previous quarter.
- Nine big mortgage lenders, representing about two-thirds of the market, made about $9.1 billion in the first six months of the year off loan originations [..]. In 2008, those lenders made about $3.3 billion for the whole year.
- "There's been a return of fees - originating fees, underwriting fees, processing fees - fees you haven't seen in years," says Guy Cecala, publisher of Inside Mortgage Finance. "There are roughly 12 to 20 fees you wouldn't have seen as recently as two to three years ago. But lenders can charge them, so they're charging them. "This is the greatest period in recent memory for generating income,"
- Then there's the issue of the massive government subsidies designed to spur lending, resulting in low interest rates for mortgages.[..] Ironically, the fact that government-supported mortgage giants Fannie Mae and Freddie Mac now back four out of every five new mortgage loans has made the process for lenders much easier. "We live in an automated mortgage processing environment,"[..] Fannie- and Freddie-backed loans require little more than a few clicks of the mouse on the part of the lender. "If you type in Fannie or Freddie, the system will tell you whether it's a go or not.
Inevitably, in an environment where a government and central bank are so eager to hand out public funds to keep a long-dead skeleton of an industry "alive", what's left of that industry will try to drive an ever harder bargain. So when the government shows its fear of a coming wave of Option ARM foreclosures, you get this:
Lenders and government officials are searching for ways to head off a wave of defaults on pay-option adjustable-rate mortgages, which are threatening to become the next storm to hit the U.S. housing market. ARMs aren't easy to modify because of the risky features of the loans and their concentration in states where property values have plummeted the most.
- Administration officials have been talking to mortgage investors and servicers about ways to help option ARM borrowers avoid foreclosure, but the parties don't appear close to a solution. A major sticking point: whether lenders need to forgive loan principal to help the borrowers stay in their homes.
- The major mortgage servicers - J.P. Morgan Chase & Co., Wells Fargo & Co. and Bank of America Corp. - also hold large portfolios of option ARMs acquired through purchases of other banks. Investors suspect that they are reluctant to forgive principal on option ARMs in their servicing portfolios because that could trigger write downs of the banks' option ARM holdings.
Now, first of all, loan modification programs initiated by the Obama administration have overall been miserable failures so far. And second, when a government offers truckloads of money to save companies, and the latter respond with entire lists of demands for the privilege of saving them, you have a real big political problem on your hands, so much so that you have to wonder about that government's intentions. The public's best interest would undoubtedly be served by saying something like "if you don’t want it, take a hike". But that's not happening. And with Tim Geithner's phone pals in line to be the main beneficiaries of what does happen, that should perhaps not be too much of a surprise.
To keep the mortgage money machine rolling, new tax credits for home buyers are about to be agreed on, this time for all buyers, and with more credit to be had. Calculated Risk points out that if you look at only those people who would not buy a home without the help, the overall cost of the newly negotiated credits would come to between $100,000 and $150,000 per home. That is the kind of thing you find in your thesaurus under perverse.
While still stuck in the unbelievable mess they've created in the domestic real estate market, the same parties, the Fed and Washington, that have the political power to hand out your funds, are now turning their eyes towards commercial real estate. There is no reason whatsoever to assume that their adventures in that field will be any more successful, or any less expensive (to you) than what they've so far lost by intervening in the housing market. And lost it is, don't you doubt it, all the trillions of dollars of it. A large chunk of it will go to the friends-of-Timmy banks, and the rest will simply evaporate as home prices keep plummeting. The trillions have achieved no more than a year, maybe 18 months, of respite. Not respite from falling, prices have kept on decreasing, but respite from falling much harder.
There is nothing the government can do to stop this. Why not? Because consumer credit is plunging, and will continue to do so for some time to come. Because there are 10.6 million properties available, or 25 months worth of inventory at present market sales speed. Because prices have a long way more to fall before they fall into any realistic "affordable" scale. Because unemployment rises by between roughly 500,000 and 1 million people each month. Many more will lose their homes to the equally rapidly rising numbers of foreclosures, adding still more inventory to what's already there.
Obama, Geithner and Bernanke need to get the hell out of the mortgage market, or they will squander more and more taxpayer money on lost propositions. And all this is so obvious that it's impossible not to wonder why they do what they do. The answer to that question can be found in Tim Geithner's rolodex.
The number of homeowners who are underwater is getting bigger all the time. Another 10-15% drop in prices will see well over half of them owing more than they "own". And while that process is in full flight, the government induces the next batch of hapless dreamers to become part of the American nightmare, apparently not hindered by any moral compass.
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