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Fannie Mae Posts Big Loss. Asks For Another $15 Billion… then offers to lease you your own home.
You wake up one morning,
bleary eyed, browse the paper over your coffee, and happen across the real estate section where you notice what looks like an oddly familiar property. The ad reads:
Mid-Town Charmer, 2+2, fireplace, deck, Close to Everything! Just $1600./mo
– 1 Year Lease (Fannie Mae)
As you squint at the picture in the ad you suddenly realize you are looking at your own front door. Yes! The address confirms it. 123 Anywhere Court, Anytown, America. What’s going on here? You’ve been behind in your payments and at the edge of foreclosure since your job cut back hours. Now you bring in only $4800 per month. Your mortgage was a hefty $2200. on the loan you were so eager to sign in 2005 at the height of the housing boom. An Option ARM, it has since reset to $3000. leaving you just $1800/month for all other expenses and food for your family of four. Since 2005 the value of your house has plummeted by over 35%, wiping out your meager down payment and any hope of building equity for years to come. In fact, with interest and fees, you now owe more on the house than the day you signed the loan! You’ve been waiting for the foreclosure notice, since efforts at loan modification have all been rebuffed by the banks, but never in your wildest dreams could you imagine your very own home up for lease.
Perhaps you should have opened your mail. There’s a letter there, along with all the other delinquent bills, from your friends at Fannie Mae. They backstop the paper on your loan
and, as millions of loans have gone bad, their portfolio is rotting away like a pile of dead carp in a hot summer boardwalk. Face it, the mortgage industry stinks these days, and Fannie and Freddie are two great
landfills holding trillions in toxic bad mortgage paper. But not to worry! They’ve come up with a nifty new plan. Instead of issuing you that foreclosure notice, as the law presently mandates. They sent you a
nice letter offering to lease your “Mid-Town Charmer” back to you if you just quietly sign over the deed and release any interest in the home. The hook? Your lease payment will be much lower than your
mortgage payment, and it may allow you to stay in your “home” instead of hitting the street with a foreclosure.
On November 5, Fannie Mae made this pleasant announcement in an official press
release: “Fannie Mae (FNM/NYSE) is implementing the Deed for Lease™ Program under which qualifying homeowners facing foreclosure will be able to remain in their homes by signing a lease in connection with
the voluntary transfer of the property deed back to the lender.”
The program masquerades as a benefit to the homeowner, but in truth it is nothing more than an effort to avoid facing the same nightmare you’ve been living with on Elm Street the
last couple of years as your house lost all it’s equity and your loan was swamped by the housing crash. You’re so far “underwater” on the house now that you would need a deep sea diving suit
for ten years or more just to keep breathing.
Analyst and now Senate candidate Peter Schiff was quick to condemn the program. “What an incredibly stupid idea! This is a joke. The government as the landlord is going to be
burdened with all the maintenance and upkeep of these properties. And there’s no way they can sell these as investment properties, because the rent will be too low.” Schiff believed the effort was to
keep properties off the market to bolster housing prices, but correctly pointed out the fallacy of also subsidizing new housing construction in this over saturated market, where we already have 25 months of unsold
housing inventory. Yes, the idea was stupid, but he missed the point when he called the program a “get out of jail free card” for underwater homeowners.
Why is the Fannie program a scam? It’s quite simple. If Fannie forecloses on your house they have to eventually mark down the loss and take it to short sale. This puts a low end
house on the market, further depressing prices, and also puts a big loss on their books. If they don’t foreclose, statistics tell them you are ready to default. You’ve been contemplating mailing back the
keys and walking, like millions of other folks have, to cut their losses and start over again. They can rent homes on the glutted housing market now for thousands less than their mortgage payments, and they ditch
maintenance costs, hassles and property tax payments as well. Fannie Mae knows that all too well. So rather than foreclosing, and taking the loss onto their books, they decide to lease you back your home at a lower
rate. And throughout the term of that 1 year lease they will carry your loan on their books at its full value. Bingo! They avoid facing up to the grim reality that the house has lost 35%-40% of its value, and will likely lose another 5% in the coming year. They continue the delusion and denial that your house is still worth what it was in 2005. And they become your new landlord as well. Welcome to the dream of home ownership turned nightmare.
For one little moment, as you considered just walking away, all the power was yours. Yes, you were going to lose your home, but you’d find another. And the money you would save from
all those mortgage payments you weren’t making would really help. The bank who made your home loan, rigged to explode like an IED, and Fannie, (the loan guarantor), would have to mark down the staggering loss.
Sure, it was going to hurt to lose your mid town charmer. But you were in charge, taking your life back and getting out from under the smothering weight of all that bad debt.
Unfortunately, banks don’t much like the idea of you getting out from under the debt they’ve saddled you with. So if they can weasel you out of your deed and make a lease
slave out of you at the same time, then they can continue to pretend your house is still worth what it was in 2005. And when your 1 year lease runs out, the power is again all theirs, just the way they like it. They
can choose to extend your lease, or offer you month-to-month terms, and if you pull any late payment nonsense this time the eviction process will go much smoother than the year long agony of foreclosure.
Economics Blogger Karl Denninger agrees. He greeted the November 5 press release with this pointed assessment. “This is yet another scam folks, all courtesy of our government who
will do anything to avoid admitting the extent of the liabilities that are now in Fannie and Freddie's portfolio (and by extension, partially in The Federal Reserve as well!) But the economy is getting better,
right? That's why we keep seeing scheme after scheme, scam after scam, all intended to do one, and only one, thing - avoid a true and accurate accounting of losses that have already occurred.”
Yet we are told we must do this to prevent even more damage to Fannie’s withering portfolio. It’ simply too big to fail, right? Professor Black of the University of Missouri
-Kansas City School of Law has heard all the arguments about “too big to fail” and rejected them. From Paulson’s panic to Goldman’s shifty dealings in the market, there is an
endemic idea that if we change the system, force the bad debt out into the light of day, it will cause a total collapse. "If that's true we've got to get rid of capitalism," Black
warned, "because if we can't recognize losses in a capitalist system we have no future."
The Shell Game
Losses, and who gets stuck with them, is really what this whole shell game is about now, both in the financial system as a whole, and in Washington. Fannie Mae just posted a $19.8
billion loss for the third quarter of this year. They also filed a claim on the bones of defunct Lehman Brothers for another $15.6 billion in derivatives losses. Good luck with that. One must
also wonder what there exposure is with other firms? Undoubtedly billions more.
What did Fannie do with these losses, stick it to shareholders and fat cat investors? Nope. They went directly to Uncle Sam and asked for another $15 billion dollar bailout as a
Christmas present. This pushes the bailout tab for Fannie and Freddie to $111 billion. In short, they stuck YOU, the taxpayer, with the losses. Why not spread the pain around? The only
thing wealthy investors and banks are interested in is holding on an exclusive basis is the profits. The losses go to you and I….along with a 1 year lease agreement.
The nub of this matter is that Fannie’s ninth straight quarterly loss of $19.8 billion is just the
tip of the ice berg—a convenient metaphor, for the rest of the “losses” remain unacknowledged
, a massive frozen hulk of bad debt, well “underwater” and hidden with accounting tricks and scams like the new Deed for Lease program. The idea is to postpone the inevitable reckoning
with bad debt as long as possible. Ilargi of the Automatic Earth has it so right: “Extend and pretend, the economic version of don’t ask don't tell, rules the day.”
Seeking Alpha is right on with this scathing assessment: “Decades from now the summer of
2008 will likely be remembered to mark the turning point where legislative blundering took an otherwise serious financial crisis and molested it into an epic financial collapse. By fully
assuming the liabilities of Fannie Mae and Freddie Mac, the two colossal and corrupt government sponsored enterprises, the federal government, led by Treasury Secretary
Paulson and Federal Reserve Chairman Ben Bernanke, has thrust taxpayers into an abyss of insolvency with one mighty shove.” With a $4.7 trillion dollar portfolio of mortgages and a
skyrocketing default rate it was then decided that these losses were so massive that they had to be contained at all cost--and the cost has been billions, possibly trillions more. Yet the
government won’t really admit the scope of the damage or face the reality of what has happened.
Interviewer Dylan Ratigan asked Professor Black if the present round of bailouts and backstops wasn’t just a legalized gambling casino on Wall Street. Black responded: “We not
only legalized it, we backstopped it. If you win, it all goes to you, (the banker); if you lose, it all goes to the taxpayers, and the American people. That is insane.”
Equally insane is the idea that trillions in derivatives and securities “swaps” still remain hidden
and unregulated to this day. The banks simply do not want to give up their basic game of protecting profits by passing on the losses to someone else, which is exactly what securities
and insurance swaps were designed to do. Imagine getting a huge phone bill this month, with massive charges, but no accounting or listing of what numbers were called, how long the call
was, etc. You just get the bill and an order to pay up or disconnect. That’s the deal the banking system offered the government last fall when Paulson screamed collapse and martial
law in the closed rooms of congressional offices. We got the bill, with no real accounting of how big the losses were, the parties involved—just the bill. It was simply assumed that the party who would pay was you. The investors walk, continue the game, and roll out big bonus
and salary increases. You get the bill.
The Obama administration has been sad failure. It has really done nothing to bring these losses out into the light of day, force the banks to acknowledge them, and pass them on to
the people who should have taken the hit—the investor-shareholders, not the public. This is no surprise, as Obama’s chief economic advisers, Summers and Rubin, were largely responsible
for leading the fight to repeal Glass-Steagall, a Depression era bill that prevented banks from trading in securities and making the raft of other shady “investments” that have all gone bust.
So you see, the real power in this game, Summers, Rubin, Geithner, Bernanke, and the legions of ex-Goldman Sachs employees in key government positions, are all busy making
sure that the great game the financial system concocted continues.
It’s amazing that after over twenty trillion in bailouts, loans, guarantees, backstops and Fed
programs, we still have no transparency, no regulation, no accountability, and therefore no hope of ever resolving this mess. This was not the change I, and millions of Americans, voted for.
Ratigan’s solution?
“1. Inject transparency, primarily to bring almost $600 trillion of crooked insurance scams to
the forefront. Force almost all swaps onto exchanges, not just the 20% as current proposed reform does.
2. Demand capital to back Wall Street's gambling.
3. Enact a tax-code to encourage long-term investment and discourage short-term profit. Fortunes should not be made in minutes but over years through the creation of value to society.
4. Break up the Too Big To Fail banking institutions. Start with Goldman Sachs and J.P. Morgan. Right Now.”
And an astute reader commented further:
“5) Reinstate Glass-Steagall. The 1999 repeal should be undone.
6) Outlaw Credit Default Swaps. Banks buy them, then push the target companies into
bankruptcy, and cash in. Jobs lost, companies dead.
7) Close Fannie & Freddie.
8) Outlaw securitization that passes on the repayment obligation to others.”
To this I might add:
9) Fire Rubin, Summers, Geithner and Bernanke, and purge the government of lifetime Goldman Sachs Fraternity members. Now.
10) The next time there’s a big urge for a $15 billion bailout, send me the check. I’ll help
hundreds of thousands of people with that money. Send it to Fannie and it vanishes into the black hole of bogus accounting.
All along the solution to this crisis has been before us, plain to see. The problem has not been
what to do, but having the will to oppose the financial power centers that have stolidly resisted change and regulation, and who still continue to gamble away billions to this day, passing the
losses on to future generations of American taxpayers.
Did it ever occur to the geniuses on Wall Street that if we simply admit the losses, reset all mortgages to a real current market value--lowering the payments accordingly, that this whole
crisis would simply stop? Lower most folks housing cost by 30% to 40% and they would have no problem making their payments. All the loans would stop defaulting. No one would be
“underwater.” People would suddenly have that 30% to 40% extra to throw at credit card debt or to spend again, revitalizing the Main Street retail economy and laying the groundwork for
new job growth. Yes, if the banks, investors and property owners would just admit what has happened, and take the haircut, we’d be through this in a year or two, and back on the road to
prosperity. But because they adamantly refuse to accept the losses they created, insisting on passing them on to you, this crisis will now drag on for a decade.
Meanwhile, back on main street, the unemployment rate “officially” topped 10%. This number
excludes all “discouraged workers” who haven’t looked for work in recent months…millions. . It also excludes all people whose benefits have run out…millions more. The real number of
unemployed, that is people who want to work, but cannot find jobs, is now over 20%. We have lost 7.5 million jobs since December of 2007 when the recession began. The BLS 10.2%
figure is just another game of pretend. But three things cannot be hidden, goes a simple Zen saying: the sun, the moon, and the truth. The truth is that 1 of ever 5 potential workers in this
country are now unemployed. The number of people out of work for 27 weeks or longer has set a new record, nearly tripling the average in that category for all years since 1948. Workers in
the younger age brackets are taking the hardest hit, with only 46% of eligible workers age 18-24 now employed.
A silent rage is building up with each new headline where a bloated, insolvent financial institution requests another truckload or two of free money in nice even billions. No money for
health care, however. Just a debate for the cameras and good old time partisan politics.
Fannie needs another $15 billion? No problemo!
The silent rage has an ugly way of manifesting itself. Yahoo news reported on Nov 6: “ORLANDO, Fla. – A gunman opened fire Friday in the offices of an engineering firm where he
was let go more than two years ago, authorities said, killing one person and injuring five others…Asked by a reporter outside the police station why he did it, he replied: "Because
they left me to rot."
So there’s a cost, in real human terms, for every job lost. A lost job can take away a person’s
self respect, sense of worth, dignity. A nation where so much ammo has been bought in recent months that it’s hard to find can become a dangerous place very quickly. As
unemployment benefits run dry, hopelessness spreads, one must ask how many others are out there in the darkness, with a grudge and a gun?
Don’t worry, I’m not one of them. I still have a job because I created it myself twenty years ago.
Article By:
John Schettler
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