Over the last several months, my persistent question is how 6% foreclosure rate can bring down a housing market, then a credit market, then a banking industry, then a national economy, then a global economy.
The numbers have never added up.
The Great Depression had 25% unemployment. We have been in the 5% unemployment range. GDP fell this quarter, but less than expected. Not a definition of crippling credit crisis and global recession.
The numbers do not add up.
FNMA and Freddie Mac made A paper loans, full documentation. How did they get in shape to require a bailout?
The numbers do not add up.
Then I learned Fannie and Freddie bought "credit enhanced" subprime loans and Alt A mortgages. These purchases were outside their charter. They bought the mortgages with full knowledge of Congress and the regulators.
How did they get away with it? My guess - lobby money.
What is a credit enhancement? At first I did not understand that phrase.
Some months later I learned what credit enhancement means - insurance in the form of a credit default swap.
A credit default swap is a way to share risk on an investment. It is an unregulated market. Why is it unregulated? It is allowed because of the Commodity Futures Modernization Act passed in 1999 and signed by President Bill Clinton.
Why was this move to unregulate the investment industry taken so soon after the S&L crash? My opinion is lobby money.
Reading about credit default swaps can cause confusion.
The credit default basically is a guarantee given for a paid premium. The guarantee is that should a bond fail the bond investor will be reimbursed in full the bond amount. Bonds typically do not fail. Seems like good income for the credit default insurer, for a low risk.
Even if the bond fails, most likely the failure should not wipe out the entire bond value.
My question is how did credit defaults cause the entire industry to crash. If the bond fails, credit default pays and takes the partial loss on the bond default. How can these losses be so high?
The numbers do not add up.
A little further study on credit default swaps. The actual credit default market is in the range of $60 trillion.
Now misplacing $60 trillion can mess up an economy.
The entire mortgage debt is $12 trillion. How can the credit default swap market that is supposed to be a guarantee for some of the bond holders (not all) in case of default of a particular bond?
I asked some knowledgable mortgage people this question. The answer. No one really understood. "It is complicated."
The numbers do not add up.
Take time to read this NPR report. Here is the NPR audio report of how credit default swaps work. Come to find out. Credit default swaps are not complicated. They simply are a swindle, a massive swindle, approved by Congress.
Investment bankers oversold the credit defaults. They swindled investors selling insurance that they could not back their guarantee. They allowed gambling on bond defaults by risk takers who purchased insurance on assets they did not own. They created mortgage loan programs that were fundamentally speculative and led to excessive defaults.
The authorities in Congress and in the regulatory agencies do not want a qualified family to be able to use seller funded down payment assistance to purchase a home with an FHA loan. But they are OK with a hedge fund overleveraging a bond guarantee and bringing down the world economy.
The authorities in Congress and in the regulatory agencies do not want a qualified family to be able to use community reinvestment funds or 100% conventional lending to purchase a home without a down payment. But they are OK with investment banks sellling bogus, unregulated, under capitalized insurance to bond investors.
Why are they OK with this? My guess - lobby money.
The authorities in Congress and in the regulatory agencies want to blame the families who worked to make house payments or loan officers who followed program guidelines. They want to distract attention from this very real and massive fraud and shift attention to minute errors on a truth in lending disclosure or lender paid service release premiums.
They want to focus attention on tens of dollars so we miss trillions of dollars.
My opinion is that a vote for an incumbent is a vote for corruption. But that is just my opinion.
BTW, that $700 billion bailout that was supposed to buy defaulted mortgages and rehabilitate them so they could be resold into the mortgage investment market - who is getting the money? And what is it being used for?
For those who are pissed at the media, it may be your anger is a little misplaced. Keep the finger pointed straight at Congress and the investment bankers. The ones who put us in this mess are the ones who are responsible now with getting us out, debating the new regulatory environment and in charge of $700 billion to bail out our economy.
Richard Smith
American Acceptance Mortgage, Inc
Toll Free 888-474-9920 Cell 423-280-0345
Home financing in Tennessee, Georgia, and Alabama.
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Hi Richard
There are more questions about the bail out then answers and your are right on target the numbers do not add up.
Good luck and success
Lou Ludwig
Richard,
Thank you. Very interesting blog. I will have to read it a couple of times to really understand this. So far you are making a lot of sense.
Richard - Outstanding explanation! I believe that we have been ripped off and the worst part is that it was all legal...
Debbie, Jon, Lou,
Thanks for commenting. The real help is to listen to the NPR piece. Please take time to listen to it.
My jaw dropped when I finally understood what happened.
Richard
Foolish to believe what you hear from the people who brought us here. Its the leverage if the banks and investment firms that maginfied the real issue. Some people wanted an explanation but the powers wnated to get this in before vetting the details.
Hi Richard, this may not be germain but is it within the realm that all this even including most of the reaction and the timing has been carefully orchestrated ?
Im not seeing the bailout money do anything for my buyers. It has actually gotten worse with the lenders instead of better. No it doesnt add up.
Quinton,
I am an average person and went along with the company line, until they ruined my industry. We don't know what is going on, and will not find out until some new people get in. A mass of new people who will be offended by the kick backs, the "negotiations" that add bad bill riders to larger bad bills so they all can be passed, the massive lobby money purchasing "access" - a code word for vote my way.
Richard
Eric,
You have explained my thoughts very succinctly.
Thanks,
Richard
William,
I live a naive life, maybe less so now. I am not a conspiracy believer, but probably should be. The bankers are all being protected, and just the bigger ones. It is almost like this game we were playing has gotten out of hand and the losses are so big that we need to get the game over and protect the few winnings of a few.
Who really cares about the losers? They will keep on churning in the new circumstances.
This is my read on the matter. Here is a link to a video about the true nature and source of value for money. It was placed in a comment on one of my previous blogs. Well worth a look.
http://video.google.com/videoplay?docid=-9050474362583451279
Richard
Laura,
One thing is plain. The bailout is not designed to help buyers. The money is not being used to encourage lending. Credit guidelines have tightened. Cost (rates and MI) have increased. Underwriters themselves have tigntened. Down payment requirements have increased.
The bailout is not being used for its initial purpose - buying bad debt. Its not being used for the secondary purpose - to increase lending capital.
It is being used to consolidate the banking industry under a few winners that the people distributing the bailout funds are choosing.
Of late there is some pressure to throw some money towards homeowners struggling with foreclosure. It is a relatively small amount. The details are slow to come - much slower than the money being sent to the larger winner banks.
Where will Paulson work when his term is over?
This really looks less like something to help the housing market or the economy, and more like something to help large banks.
The more I start to understand the worse it looks. Our only recourse is the vote, and unfortunately we will vote back in the very same incumbents who brought us to this dance.
Maybe Sen Stevens will get voted out, with his gross corruptions exposed. But I suspect he will win election, again.
I used to be in favor of term limits - I am now most certainly in favor of term limits. Just one term, then get back to work.
Richard
I'm with you on the numbers just not addding up. I think we are intentionally being mislead but the truth is slowly coming to the light. I had never even heard of credit default swaps till a few weeks ago all we heard about was subprime mortgages. It makes me wonder what other big things are going to come to light regarding our financial system.
Very good post. I didn't realize it included a "betting" angle. I couldn't figure out either how the money got so big. Now it makes sense. We probably don't really want to hear the bailout is for the richest and biggest but how many times have you heard small business drives employment. Bah humbug!
Richard, $60 TRILLION? I think I'll be sick. Wow, I had no idea how screwed up this mess truly was until I read your post. WHAT A MESS....and you didn't run for President? Is it too late? lOl...great post Richard.
Richard, wow, what a totally awesome rant. Thank you for bringing to light things I never knew before.
"How did they get away with it? My guess - lobby money."
Lobby money, lobby money, lobby money.