Financial historians will see a pattern of political abuse when it comes to the mortgage machinations of the Government-Sponsored Entities, Fannie Mae and Freddie Mac. Everything from giving jobs to the boyfriend/lover of the House Financial Services Committee Chairman Barney Frank as well as other well-connected democrats to manipulating the financials to earn tens of millions in unearned bonuses for corrupt executives. The same Barney Frank who famously said that both GSEs should be instruments of “public policy.” Roughly translated, to adopt policies which create vehicles to fund our friends, purchase votes in the minority community and to guarantee projects in politically sensitive districts.

So when Fannie Mae and Freddie Mac were placed under government conservatorship and their finances under greater audit scrutiny, many in the mortgage industry were wondering how long it would be before the democrats turned the Federal Housing Administration into another democrat piggy bank. With the same patterns of forgiveness and relaxed underwriting standards that crippled the mortgage industry during the first mortgage meltdown.

Is history repeating itself?

FHA gives those who defaulted on homes another chance

The FHA is a major source of cash for so-called rebound buyers, but the bankrolling of borrowers who contributed to the last housing bubble is raising concerns.

The FHA, which backs nearly 8 million loans, is helping rebound buyers recapture the American dream, boosting the housing market in the process. But that's touched off a fierce debate about the financial and ethical wisdom of bankrolling borrowers who contributed to the last housing bubble — and the potential cost to taxpayers.

The agency has suffered deepening losses in the last three years that have put it under enormous scrutiny.

Created during the Great Depression to revive the devastated housing market, the FHA doesn't originate loans. It guarantees mortgages made by banks in exchange for insurance premiums. The agency now insures more than $1 trillion worth of homes. This year it has backed roughly 14% of all mortgage originations, according to the trade publication Inside Mortgage Finance.

Critics worry that the FHA is foolishly allowing marginal buyers to get loans just three years after foreclosure with as little as 3.5% down. What's more, the agency doesn't even track how many rebound borrowers it backs. <Source: Los Angeles Times – November 14, 2012>

When you combine Fannie Mae, Freddie Mac and the FHA, there should be little or no doubt that the government is interfering in the mortgage marketplace to the extent it appears to control the majority of loan guarantees – thus insuring loans with the taxpayer’s money for the benefit of the large financial institutions that issue mortgages. And when you consider that the Federal Reserve is purchasing $40 BILLION per month in dodgy mortgage paper from these same financial institutions – and keeping federal funds rates artificially low to benefit the very same financial institutions – you have the making of a giant financial catastrophe which can plunge the United States into a depression. Not a recession, but a full blown depression when the second mortgage market bubble bursts.

And burst it will …

Has anyone else noticed that the government’s interference in the mortgage markets prevents the market from finding its true bottom. And until that bottom is reached – all of the dodgy paper and real estate cannot be correctly and reliably valued. Making the true valuation of a financial institution’s balance sheet a matter of pure speculation that is not grounded in “hard asset” reality. Many homes in decaying neighborhoods are physically decaying and are trending to the point where it might be more cost effective to bulldoze them into the ground. Our population is aging and our employment picture – the true driver of real estate valuations – is also decaying.

And the rosy projections of the National Association of Realtors cannot be trusted ever since their touted expert economist was caught issuing rosy real estate projects at the height of the bubble burst and beyond.

Someone is noting a problem …   

FHA projected to exhaust reserves, could need bailout

November 16, 2012, 4:46 a.m.

The Federal Housing Administration, which has played a crucial role in stabilizing the housing market, said it ended September with $16.3 billion in projected losses -- a possible prelude to a taxpayer bailout.
The precarious financial situation could force the FHA, which has been self-funded through mortgage insurance premiums since it was created during the Great Depression, to tap the U.S. Treasury to stay afloat. The agency said a determination on whether it needs a bailout won't come until next year.

The FHA is required to maintain enough cash reserves to cover losses on the mortgages it insures. But in its annual actuarial report to Congress, the agency said a slower-than-anticipated housing market recovery has led its reserves to fall $16.3 billion below anticipated losses. The FHA's cash reserves aren't supposed to drop below 2% of projected losses. They ended the 2012 fiscal year at -1.44%, down from the seriously low level of 0.24% at the end of 2011. <Source: Los Angeles Times, November 16, 2012>

Bottom line …

Just as Barack Obama appears to be recycling his first term’s policies – themselves little more than renamed Bush-era policies – we are on the cusp of another financial crisis. One created, managed and exploited for the political benefit of the democrats and their financial industry supporters. Many people, myself included, believe that the financial institutions were never for businessman Romney, they were, in fact, all in for entitlement-maven Barack Obama.

Until we get fiscally responsible politicians, best practices indicate, secure your job, reduce your debt load and adjust your standard of living.

-- steve