The first time around, the three-headed federal serpent – the Bush administration, the Treasury Department and the U.S. Federal Reserve – used Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) to “legitimize” trillions of dollars worth of toxic financial waste known as subprime mortgages.

The result was the worst financial crisis since the Great Depression – a mess that was global in nature.

And we’re now headed for a repeat performance.

Some of the players may have changed since the first subprime-mortgage crisis, but the game apparently remains the same. With banks currently unwilling to lend, the new federal triumvirate of the Obama administration, the Treasury and the Fed are trying to inflate the moribund U.S. housing market. This time around, however, the FHA is the weapon of choice.

Obama & Co. are making an all-or-nothing bet that the U.S. economy will recover and bail out the housing market before the final bill for this ill-advised gambit comes due.

When this bubble bursts – and it will – U.S. taxpayers will be on the hook for more than $1 trillion in government-guaranteed debt.

Ginnie Mae: Fannie and Freddie’s Once-Quiet Cousin

As a direct result of the real-estate meltdown, U.S. banks have become reluctant lenders. And they’ve raised their loan standards considerably. Federal officials knew they had to keep the mortgage spigot open, especially to suspect borrowers, so they turned to their new “secret weapon” – the FHA.

The FHA has been cranking out new government-insured subprime loans, which it packages into government guaranteed securities for sale to banks. This frightening reflation of the subprime bubble is being engineered for two key reasons:

• To put a floor under falling house prices.
• And to let banks swap toxic Fannie and Freddie securities for new toxic debt that is 100% guaranteed by U.S. taxpayers.

The almost inevitable insolvency of the FHA could rapidly undermine the fragile recovery of the U.S. economy. And it could plunge stock prices and bank viability to new lows.

Why the FHA?

That’s simple. In an era of increasingly stringent lending standards, the FHA’s standards are laughably lax.

Created by the National Housing Act of 1934, the FHA insures private mortgage lenders against borrower default on residential real estate loans. But its current allure is that it opens the door to prospective homebuyers who almost certainly wouldn’t qualify for a conventional home mortgage. These are buyers with no credit history, a history of credit problems, or not enough cash to cover the down payment and closing costs.

The FHA has quadrupled its insurance guarantees on mortgages in just the last three years, with the bulk of that growth coming in the past two years. Currently, the FHA insures $560 billion of mortgages.

Loans that are FHA-insured are pooled and packaged into mortgage-backed securities (MBS) by the Government National Mortgage Association, more commonly known as Ginnie Mae. Ginnie Mae insures the actual MBS pools composed of FHA loans. Ginnie Mae securities are the only mortgage-backed securities backed by the full faith and credit of the U.S. government.

Two weeks ago, Ginnie Mae proudly announced that it had issued a monthly record $43 billion in FHA mortgage-backed securities, and through the end of July held guaranteed securities with a value of $680 billion. It is on track to exceed $1 trillion worth of guaranteed securities by the end of calendar year 2010.

Ginnie Mae is a cousin of its better-known siblings Fannie Mae and Freddie Mac. Those two mortgage giants are technically insolvent, and were forced into government conservatorship at the height of the financial crisis – ostensibly due to concerns that foreign central banks in China, Japan, Europe, the Middle East and Russia might stop buying our bonds. As “government-sponsored enterprises,” or GSEs, Fannie and Freddie were only supposed to have the “implicit” backing of the U.S. government. But recent events have shown these to be fully backed by taxpayers.

The implosion of Fannie and Freddie severely threatened the mortgage market. It essentially shut down the two giant repositories that bought the loans banks and mortgage originators didn’t want to hold as assets on their own balance sheets.

The FHA and its mortgage-backed securities “factory” – Ginnie Mae – have taken up where Fannie and Freddie left off, and are now the dumping ground for toxic mortgages. Using the FHA is the core strategy in the administration’s misguided effort to prop up mortgage origination and modifications, real estate prices and insolvent banks.

Warning Signals?

Administration officials might want to take heed of some eerie parallels between the current situation and the one involving Fannie and Freddie. They could serve as an early warning system.

First and foremost, the FHA has already started to acknowledge systemic fraud in its business. In the earlier subprime crisis, similar circumstances led to the revelation of massive fraud in the issuance, packaging, ratings and sale of subprime toxic mortgage-backed securities.

On Aug. 4, the FHA suspended Taylor, Bean & Whitaker Mortgage Corp., one of its largest approved independent mortgage originators, from making anymore FHA-backed loans. The suspension came one day after federal investigators raided Taylor Bean’s Ocala, Fla., headquarters.

Since 2007, the value of FHA-backed loan originations underwritten by Taylor, Bean had soared 117%. By contrast, the origination of conventional loans by the firm dropped 34% over the same period. Taylor, Bean subsequently filed for bankruptcy.

Earlier this summer, the U.S. Department of Housing and Urban Development (HUD), which oversees the FHA, raised concerns about FHA practices. On June 18, HUD released an internal inspector general’s report that revealed that the FHA’s default rate exceeded 7% and that more than 13% of its insured loans were delinquent by more than 30 days.

In a “Review and Outlook” piece, The Wall Street Journal reported that the FHA’s reserve fund dropped from 6.4% in 2007 to about 3% today, putting it dangerously close to its mandated 2% minimum. That translates to a “33-to-one leverage ratio, which is into Bear Stearns territory,” the newspaper report stated, referring to the now-failed investment bank that had been a central player in the original subprime mortgage crisis.

Bear Stearns is now owned by JPMorgan Chase & Co. (NYSE: JPM).

The HUD inspector general’s report stated that the agency’s growth makes it “vulnerable to exploitation by fraud schemes” and that it may need “Congressional appropriation intervention.”

In a recent article – “FHA Disputes Whispers of Capital Reserve Problems” – on the Mortgage News Daily Web site, HUD Secretary Shaun Donovan said in June that “there’s a better than even chance that we will stay above the two percent reserve threshold. That suggests, not just for the 2010 business, but overall for the portfolio, that we’ll more than likely to stay out of a broader need for any taxpayer funding.”

It may be more than a little disheartening to know that in a very uncertain economic environment, precisely due to fraud in mortgage lending and increasing borrower defaults, that our government is stretching a 50/50 wager on the backs of taxpayers.

That’s only part I of the FHA dilemma story.

Part II is even more frightening.

A Look Ahead

Banks are dumping Fannie and Freddie-backed securities onto the Fed’s balance sheet and replacing them on their own balance sheets with FHA-insured loans packaged into government-insured securities issued by Ginnie Mae. Banks aren’t reducing their net assets, they are aggressively swapping acknowledged toxic securities that no-one wants for a new variety that no one will want in the future. Why?

It’s not just that Ginnie Maes are fully backed by the U.S. taxpayers and Fannie and Freddie’s securities are only implicitly backed. All of them will be covered by taxpayers.

The devil is in the details.

Because Fannie and Freddie securities are only implicitly guaranteed, banks that hold these securities as assets on their balance sheets must “haircut,” or set aside reserves, based on a 20% risk-weighting assigned to the value of those holdings.

Because Ginnie Maes are explicitly 100% guaranteed, they are considered “risk free,” and on par with U.S. Treasury bonds, notes and bills. There is no reserve requirement, or haircut, on Ginnie Mae securities.

By replacing their asset mix and holding Ginnie Maes, banks don’t have to set aside reserves. They can use the money they otherwise would have to set aside to actually leverage-up their balance sheets. And guess what they’re buying?

More Ginnie Maes, naturally.

The effect of the asset swap – basically one toxic pool for a replacement that’s not much better – creates the illusion that banks have healthier balance sheets and that they are meeting their reserve requirements. It’s such a good deal for the banks and actively promoted by the Fed and Treasury, that banks are using Troubled Assets Relief Program (TARP) money to buy Ginnie Maes.

But it’s all a façade.

Capital ratios are being manipulated and insolvent banks are being propped up.

The danger of relying on the FHA to prop up the shaky housing market by facilitating mortgage origination, modifications and refinancing to less-than-stellar borrowers will only result in more subprime loans being stockpiled on the Federal Reserve balance sheet.

Eventually, defaults will overwhelm the FHA. And the hoped-for floor in residential real estate pricing will be pulled out from under us all. The next down-round in real-estate values will expose bank balance sheets for what they really are: Over-leveraged and over-stuffed with junk. Already on the ropes, banks will lose capital and will have to tighten the credit screws on consumer borrowers even more.

We may be headed for another bruising round of real-estate and MBS-related depreciation. Even a mild financial-markets setback could put the economy and the stock market onto the canvas for a 10-count. Further pummelling of shaky consumer confidence accompanied by a couple of major bank failures could easily send the U.S. market down for the financial-system equivalent of a TKO.

Taxpayers, always the lowly cornermen holding the spit buckets, are already in place with the safety nets. We will catch the FHA loans because we insure private lenders against subprime borrowers with no skin in the game. We then will have to catch the buyers of Ginnie Maes, because we guarantee those MBS securities. And we will be forced to catch the falling banks, because we already insure depositors through the Federal Deposit Insurance Corp. (FDIC).

Perhaps our ultimate fate is that of the permanently punchdrunk veteran boxer, who rues his decision to stay in the game, realizing that he fought “one bout too many.” If that’s the case, that “one bout too many” could be Subprime Crisis II, arranged by the very market referees whose job it was to protect us from such beatings.

Source: How the Government is Setting Us Up for a Second Subprime Crisis

Years of debt and securitization finally caught up to the FIRE (finance-insurance-real estate) sector of the economy. The titans of finance refused to come clean about the real value of the ‘assets’ they sat on…and finally it came time to pay the piper.

Dan Amoss, whose recommendation of Lehman put options generated 462% gains earlier that summer, wrote in this space a year ago, “Think about how much better off Lehman Brothers would be if its management hadn’t put off the process of reporting losses, dumping impaired assets and raising new capital. Would its stock be 26 cents today? Probably not.”

So the heavy-hitters of the finance sector have surely learned their lessons and proceeded to mark down their “assets” to realistic levels over the last year, right?

You wish. Even mainstream economists like the Nobel laureate Joseph Stiglitz say we’re in a worse pickle now. “In the US and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz told Bloomberg over the weekend. “The problems are worse than they were in 2007 before the crisis. It’s an outrage.”

And how do ordinary people feel about the response their government leaders have made to the crisis? Americans are, as our friend Doug Casey would put it, ‘a bunch of whipped dogs.’ Rather, they’re supremely sanguine, compared to much of the rest of the world.

For all the honeymoon-is-over talk surrounding Obama, we’re struck by how much grumpier people seem to be elsewhere. Americans are as satisfied with the actions of Obama and Congress to the same extent Russians are satisfied with those of the Putinocracy.

We should note here that Russian GDP contracted at a breathtaking 10.9% last quarter, while consumer prices are rising at a better-than-10% clip.

Source: Have the Titans of Finance Learned Their Lesson?

Our third President and signer of the Declaration of Independence, Thomas Jefferson, long ago stated …”Banking establishments are more dangerous than standing armies”.

He also declared …“If Americans ever allow banks to control the issue of their currency, first by inflation and then by deflation, the banks will deprive the people of all property until their children will wake up homeless.”

Hello.

A second American Revolution is now at least as necessary as the first one was though few citizens have an overall understanding of the problems we face. Anything short of a complete house cleaning will be mostly a waste of time and effort. The elitist banking entities running and ruining this country must be shown the highway. Nothing less will suffice!

Who exactly am I talking about? The Federal Reserve is exhibit one. Their partners in financial crime like Goldman Sachs (NYSE:GS), JP Morgan Chase (NYSE:JPM), et al absolutely must be excised like the cancer they are.

“Tea Parties” are once again on the horizon. Lots of citizens are awakening and protesting. How keen is their focus going to be?

Those that put the preponderance of blame on President Obama, ex-President Bush, the Liberals, the Conservatives, the Trial lawyers, the unions or any other distraction will never accomplish anything worthwhile. The rot is deep, systemic and centered on money and the banking system.

Those that demonize Republicans and worship Democrats, or vice versa, have been suckered into a divide and conquer plan. My expectation is to never again vote for a Republican or a Democrat in their present form. The Demopublicans must go.

The Fed is a serial bubble blower. Their funny money products initially line the pockets of their cronies closest to the trough. From there it is directed towards distorting prices in stocks, real estate or the latest manipulated craze. Economies without foundation inevitably collapse. Our central planners need to take an indefinite overseas vacation.

America’s biggest exports over the last decade have been toxic and fraudulent financial products. The creators of this crap are the ones who have brought us to the present disaster – yet they remain in charge of sweeping changes designed to perpetuate their power and imprison us.

All of these Wall Street entities and the lackey politicians who support them must hit the road. Those behind the scenes pulling the strings have to be stripped of their illicit power.

Surely you heard about Goldman Sachs’ record second-quarter earnings of $3.44 billion? Making money hand over fist comes fairly easy when you get to implement official policy. Records follow when front running is the name of the game. They may get their bonuses now but ours will be even larger when tar and feathers once again hold sway.

Congressman Ron Paul has sponsored a bill to audit and put congressional oversight on the Federal Reserve. 261 representatives have so far signed on to this meaningful element of true change. A similar Senate bill is just getting started. Knowledgeable citizens seriously doubt the Fed could withstand an audit because of its shady dealings. This is one bill that holds some promise.

The huge majority of US citizens are really peeved, justifiably so. That anger will certainly play out in the coming months and years. The tea parties could even spill into the streets. You can rest well assured that nothing will be accomplished without a purposeful and focused anger.

Concerned Americans have a critical choice. We can rid the system of all the parasites and malignancies or just stay home and continue to get our reality through television.

You know by now I’m also going to advise you to protect yourself and those you care about. The monetary metals, gold and silver, sniff out economic, financial and monetary chaos. They’ve had a massive snort lately and more is coming. These precious metals have appreciated nicely almost every year of this decade for good reason. They should still be purchased and the speculators amongst you may consider my Resource Windfall Speculator for leveraged gains in the resource sector.

Live Free and Resourcefully,

Rusty

Source: You Say You Want a Revolution?

Concerns that Washington might nationalize big U.S. banks — which would wipe out shareholders and add to the fiscal burden — had weighed on stocks and other risky assets.

However, Bernanke said on Tuesday the significant value built up in the country’s banks would be lost if they were government-owned and though there could be a time when it became necessary to close banks down, now is not the time.

U.S. stocks rose more than three percent on Tuesday.

“It’s all about the equity rally we had last night and the U.S. shying away from nationalizing the banks,” said David Keeble, rate strategist at Calyon. MSCI world equity index rose 1 percent while the FTSEurofirst 300 index gained 1.5 percent.

Emerging stocks rose 1 percent. Oil rose 0.2 percent to $40.03 a barrel .

WANING STATUS

The yen fell as low as 97.33 per dollar , levels last seen in November. The Japanese currency also hit its weakest levels in almost seven weeks of 125.17 per euro .

A rapidly deteriorating domestic economy and political uncertainty has been hitting the low-yielding yen’s safe haven appeal, wiping out the inverse correlation between equities and the Japanese currency.

Wednesday’s data showed exports plunged a record 45.7 percent in January from a year earlier, with record slides in shipments to the United States, Europe and the rest of Asia pointing to a deepening recession across much of the world.

“The fundamental case for a weaker yen has become more pressing with Japan reporting its fourth monthly trade deficit in a row, suggesting that the current account surplus will melt down further, reducing commercial yen buying needs,” BNP Paribas said in a note to clients.

LONDON, Feb 25 (Reuters)

Then you discover that every check you wrote in the past week has bounced. And, you receive a call saying that your retirement assets are frozen. The kicker is that you had over US$1 million dollars in your account.

You try to call your bank for answers, but they won’t help you.

I know this story sounds like I’ve pulled it right out of the Great Depression. I’ve got news for you…this story is very real. It all happened last month to a US$2.1 BILLION bank in a little community in Bentonville, Arkansas.

How a Bank “Suddenly” Goes Under
in the 21st Century

It was a very organized attack. On May 9th, the accountants snuck in the back door that Friday night after 5:00pm once the bank’s doors had closed. Little did anyone know the doors were closing for good…

And under the cover of darkness, over a hundred FDIC accountants began to systematically dismantle ANB financial headquarters – the venerable US$2.1 Billion institution that had been in business just hours before.

In short, FDIC officials were there to pick up the pieces because ANB was about to become the third bank to FAIL here in the United States in just the last six months. The fourth-largest bank in Arkansas was about to become yet another sub-prime casualty that choked on their own bad loans and investments.

The unlucky customers of ANB received nothing more than a letter that stated nothing of the bank failure, but rather introduced the “new” bank – Pulaski Bank.

Yet, I am sure most customers figured out their bank had gone south long before the formal letter arrived. As of 5:01 PM on May 9th, every single account at ANB was frozen. Money market accounts to trust assets to basic checking accounts…

What FDIC Insurance Really Means
If Your Bank Goes Under

When you hear your account is “FDIC insured,” do you really know what it means? In short, it means the Federal Deposit Insurance Corp. will reimburse you for up to US$100,000 for any one account you hold in your name.

If you have a joint account, then both account holders are insured up to US$100,000. You also can secure US$100,000 for each beneficiary in certain accounts (payable on death). (For full FDIC rules see FDIC’s Guide to Deposit Insurance Coverage.)

Does this insurance help? Absolutely. But when you have an account worth more than US$100,000…well, that’s how you can lose money if your bank goes under.

Also, these days most respectable businesses make well over US$100,000 a year, so that limit is fairly easy to reach. And when accountants poured over ANB’s books, they discovered 647 accounts that exceeded that limit. That equaled US$39.2 million in uninsured funds.

FDIC representatives, who I believe must hate their jobs on a regular basis, had to call these unfortunate account holders and tell them what they lost. One ANB client lost US$1.4 million. Overnight. With no warning. And as for the rest…well historically, uninsured deposits recoup 65 cents on the dollar. Plus, it can take years to get your money back.

A shocked ANB client said to me: “It’s like [your money] doesn’t belong to you anymore…it’s theirs.”

From there, it was off to the races until a not-for-profit seller showed up at 10:00 a.m. New York time to put an end to the festivities in both metals. Another attempt at a rally in gold a couple of hours later was also repelled, and gold finished flat on the day.

However, silver came roaring back and closed on its highs of the day. If that not-for-profit seller hadn’t shown up, there’s no telling how high the price would have gone. It’s my guess that this was a short covering rally, as any intelligent not-for-profit buyer would never buy like this. The shares did well yesterday. Let’s see if we get any follow-through today.

For Wednesday, gold open interest rose another 2,274 contracts, and silver went up another 219 contracts. That’s not a lot of volume, but it’s my guess that the bullion banks were (once again) going short against all the longs that were being put on.

I note that Dennis Gartman has decided to short the gold market. He set a stop at $883 and a target of $850. He also said that he would double his short position if gold went below $870…which it subsequently did on the Comex open yesterday. The 200-day m.a. for gold is within an eyelash of $850, but as of this writing, he’s less than $6 away from being stopped out. I await developments with great interest.

The first story today is actually a Bloomberg interview with Jimmy Rogers. Rogers, never one to suffer fools gladly, doesn’t pull his punches here. Amongst other things, he says that the bull market in oil “has years to go”. The link is here.

The second story was in US Banker a couple of days ago, but I didn’t have room for it. Now the story has shown up in the Financial Times in London. You’ll see the words “$5,000 billion” getting thrown around quite a bit. On this side of the Atlantic Ocean we call it $5 Trillion. Now we’re talking serious money. The story is entitled “US banks fear being forced to take $5,000bn back on balance sheets”…and it’s linked here.

His mother should have thrown him away and kept the stork. – Mae West

I see that mortgage delinquencies and foreclosures are at a 29-year high. The ECB is considering raising interest rates next month. Then there’s oil….up $5+ dollars yesterday. And the Dow finished up 213 points. Everything is fine…really!

Have a great weekend, and all of us at CDR+ will see you right here on Saturday.

Source: And Then There is This Friday, June 6, 2008