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Whitney writes: "The housing depression continues into its 5th year with no end in sight, mainly because the people who created the crisis are still in positions of power. And, they're still offering the same remedies, too, like handing the banks another blank check to save them from losses on their bad bets. That's what this new 'housing stabilization' boondoggle is really all about, bailing out the bankers."

Federal Reserve Chairman Ben Bernanke went to Congress this week to pitch a new 'housing stabilization' plan, 01/10/12. (photo: Alex Wong/Getty Images)
Federal Reserve Chairman Ben Bernanke went to Congress this week to pitch a new 'housing stabilization' plan, 01/10/12. (photo: Alex Wong/Getty Images)

The Foreclosure-to-Rental Screwjob

By Mike Whitney, CounterPunch

14 January 12


ederal Reserve chairman Ben Bernanke wants US taxpayers to purchase more of the garbage loans and mortgage-backed securities (MBS) that the big banks still have on their books. (Cash for trash) That's the impetus behind the Fed's 26-page white paper that was delivered to Congress last Wednesday. The document outlines the Fed's plan for ‘stabilizing the housing market', which is a phrase that Bernanke employs when he wants to provide more buy-backs, giveaways, subsidies and other corporate welfare to big finance.

"Restoring the health of the housing market is a necessary part of a broader strategy for economic recovery," Bernanke opined in a letter to the Senate Banking and House Financial Services committees.

Indeed. The housing depression continues into its 5th year with no end in sight, mainly because the people who created the crisis are still in positions of power. And, they're still offering the same remedies, too, like handing the banks another blank check to save them from losses on their bad bets. That's what this new "housing stabilization" boondoggle is really all about, bailing out the bankers. Here's a summary from Bloomberg:

"Bernanke's Fed study said "more might be done," including eliminating entirely the reduced fees for risky loans, "more comprehensively" cutting lenders' put-back risks; and further streamlining refinancing for other Fannie Mae and Freddie Mac borrowers. The U.S. also should consider having Fannie Mae and Freddie Mac refinance loans not already backed by the government, which would add credit risk for the companies, according to the report…." (Bloomberg)

First of all, Fannie and Freddie only return loans ("put-backs") that don't meet their standards and which the banks foisted on them so they wouldn't have to face the losses. The idea that the publicly-funded GSE's should just "eat the losses" is ridiculous.

And, why - in heaven's name - would congress want to take on more risk when they can keep millions of people in their homes by simply reducing the principle on their mortgages to the present value of the house? (aka - "Cramdowns") Naturally, the losses would have to be absorbed by the banks who - by everyone's admission - were responsible for the present crisis due to their lax lending standards and, oftentimes, fraudulent behavior. This would lead to a restructuring of the country's biggest banks through a Resolution Trust Corporation (RTC) so their toxic assets and backlog of foreclosed properties can be auctioned off as soon as possible.

This is a straightforward way to fix the housing market and it should have been done long ago. Bernanke's solution is not only unreasonable, it's also deceitful. Here's more from the Fed's paper: "Continued weakness in the housing market poses a significant barrier to a more vigorous economic recovery"..(without action)…"the adjustment process will take longer and incur more deadweight losses, pushing house prices lower and thereby prolonging the downward pressure on the wealth of current homeowners and the resultant drag on the economy at large."

Did it really take Bernanke 5 years to figure out that housing is a "drag on the economy"?

No, of course not. So, what's going on now that has suddenly spurred him to act?

Well, for one thing, the banks are losing a great deal of money on the mortgage-backed securities (MBS) that they bought in the last few years. Here's the story in the Wall Street Journal:

"After flickering to life early in 2011, the market for subprime- and other risky residential-mortgage bonds has returned to its comatose state. And many investors believe a revival could be years away.
Prices on some bonds, which are backed by mortgages that don't meet the standards needed to get backing from government-controlled companies like Fannie Mae and Freddie Mac, plummeted as much as 30% last year. The ABX, an index that tracks the value of subprime bonds, ended the year at 43.44 cents on the dollar, down from 59.90 cents at year-end 2010 and a peak of 62.68 cents in February 2011
While that decline pushed yields up to as much as 17% - bond yields rise as prices fall - many fund managers have pulled out of the market due to worries about further price declines. Moreover, repeated downgrades have left too few investment-grade securities for them to own. Wall Street banks, which traditionally have played a key role in the market matching buyers and sellers, are backing away ahead of new regulations that will make it more expensive to hold riskier assets." (Investors Sour on Subprime Bonds, WSJ)

So, Wall Street's financial geniuses got back into the MBS-biz (for a second time) and got whacked again? That's right; and now they want John Q. Public to pay for it with another bailout.

And, there's more to this story, too. European banks own roughly $100 billion of these mortgage-backed turkeys which they're presently shedding like crazy in order to meet new capital requirements. That means US bank balance sheets are dripping red as the value of their financial asset-stockpile continues to plunge. That's why Sugar Daddy Bernanke has stepped in, because it's time for another multi-billion dollar bank rescue.

Look, the Fed has already purchased over $1.25 trillion of these toxic MBS which represents humongous long-term losses for the taxpayer. Do we really need more of this sludge?

Bernanke promised that the first round of quantitative easing (QE1) would boost employment (It hasn't) and improve housing sales (it never happened) The only uptick in sales occurred because the colluding banks deliberately reduced the supply of foreclosed homes they put on the market. The reduction has led to a massive 1.7 million backlog of housing units (shadow inventory) that will eventually be dumped onto the market triggering another sharp decline in housing prices. Bernanke wants to do something about the bulging inventory as well as prop up the value of sagging MBS. So, the Fed's plan actually has two main objectives; in other words, it's the double whammy. Here's more from Bloomberg:

"Since the Fed started buying $1.25 trillion of mortgage bonds in January 2009, the value of U.S. housing has fallen 4.1 percent, and is down 32 percent from its 2006 peak, according to an S&P/Case-Shiller index. The central bank is poised to buy about $200 billion this year, or more than 20 percent of new loans, as it reinvests debt that's being paid off. Some Fed officials have said they may support additional purchases that Barclays Capital estimates could total as much as $750 billion."

Did you catch that? Taxpayers are going to get slammed for another $750 billion. That's nearly as much as Obama's American Recovery and Reinvestment Act (ARRA), the fiscal stimulus that added 2 percent to GDP and kept unemployment from rocketing to 13 percent. Bernanke wants to throw that same amount down a Wall Street sinkhole.

So maybe you think this won't happen, after all, could Congress really be so gullible as to fall for Bernanke's fearmongering flim-flam again?

Maybe and maybe not. But there are some pretty wealthy and well-connected people who are betting that the Fed will do as it's told and pave the way for another hefty bailout. In fact, the world's largest bond fund (Pimco) has stumped up a mountain of cash betting that good buddy Bernanke will get the printing presses whirring sometime in mid-January. Here's the story from Zero Hedge:

"….in December the fund (Total Return Fund or TRF) doubled down on its QE3 all in bet, by "borrowing" even more cash, or a record $78 billion, using the proceeds to buy even more MBS, as well as Treasurys, which hit a combined 31% of the TRF's holdings. In other words, between MBS and USTs, Pimco holds a whopping 79% of total, mostly in very long duration exposure. In fact, this combination of long duration and pre-QE exposure has not been seen at PIMCO since late 2008, early 2009, meaning that as many banks have been suggesting, (Bill) Gross is convinced that the Fed will announce if not outright QE3 this January, then at least intimate it is coming."("Pimco Doubles Down On All In Bet Fed Will Monetize MBS", Zero Hedge)

So what does Pimco know that we don't know? More importantly, from whom are they getting their information?

And, there's another thing, too. This whole deal about converting foreclosed homes into rental properties is another scam. Here's the scoop from another article in the Wall Street Journal:

"The paper also signaled that the Fed…. will try to involve banks more directly in housing-revival approaches… One area involves efforts to turn foreclosed homes into rental properties….

Banking regulations typically direct banks to sell foreclosed homes quickly, although the rules do recognize this isn't always practical and so these properties can be held up to five years. The Fed said it is now "contemplating issuing guidance" to banks and regulators that would possibly allow banks to turn some of these foreclosed homes into rental properties…..The hope is this may help stanch the flow of foreclosed properties into markets…" ("Fed Up With the Depressed State of Housing", Wall Street Journal)

Bingo. The banks are not only sitting on 1.7 million shadow inventory of homes they've stockpiled to keep prices artificially high. They also have millions more in the pipeline when a settlement is finally reached on the robo-signing scandal. So, what are they going to do with all that backlog?

That's easy. They'll schluff it off on the taxpayer by creating a foreclosure-to-rental swindle where the government provides lavish incentives for banks and private equity scavengers to buy the homes (in bulk) for pennies on the dollar with loans provided by - you guessed it - Uncle Sam. Here's a summary of what's going on behind the scenes:

"As the Obama administration and federal regulators work on a program to sell government-owned foreclosures in bulk to investors, those investors aren't wasting any time stockpiling cash and buying foreclosed properties at auction and from the major banks.

Oakland, California-based Waypoint Real Estate Group, a major acquirer of so-called "REO to Rental" (Real Estate Owned) just announced a partnership with a private equity firm, Menlo Park, California-based GI Partners, to buy foreclosed properties….

"Our approach to buying distressed single-family houses, renovating them, and leasing to residents who are committed to a path to future home ownership is a viable solution to our nation's housing crisis," said Colin Wiel, managing director and co-founder of Waypoint in a press release. "Our partnership with GI Partners ensures we can take the next step in our company's evolution."

GI is taking an increasingly popular bet on distressed real estate, closing on a $400 million fund with Waypoint, which has plans to purchase $1 billion in distressed real estate assets over the next two years, according to its release. ("Private Equity Readying a Run on Foreclosures", Diana Olick, CNBC)

So, what do these guys know that we don't know? And why are they plunking down big money when the details have not even been released yet?

None of this really passes the smell test, does it? The only thing we know for sure is that the "fix is in" and that Bernanke will do what he always does when the banks are in a pinch. Throw them a lifeline. your social media marketing partner


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+28 # Doubter 2012-01-14 23:10
Call it socialism, call it Communism; call it anything you want, but the thing to do is to NATIONALIZE these GdDamnd banks before they grab what little is left of the economy!
(I got carried away and forgot for a moment that they already own US)
+1 # Granny Weatherwax 2012-01-16 16:27
Hear hear
+15 # amye 2012-01-15 01:40
No wonder Phil Angelides is starting one of these private equity companies to buy homes in California! Hes already super rich and all his pals like Willie Brown are too and they are about to get even richer on the tax payor dime AGAIN!!! They should ALL be in prison! Including Bernanke, most of Congress and Obama!! All evil crooks and criminals!! And we ALL know it! So insulting they think we are so dumb! Never underestimate the American or European or Asian public!!
+27 # jmac9 2012-01-15 05:34
Americans lied to European investors. Americans told the Europeans that the quality was AAA...when in reality it was filled with fraud of sub-prime trash.
Who can trust Americans for anything when it comes to...well...anything?
Iraq invasion rationales were lies of Bush-Cheney.
mortgage companies lied to get anyone to sign for properties and then lied to investors.
America lies about its involvement with murder of Iranian scientists.
America lies to cover up the Apartheid state of oppression that Israel imposes upon Islamic-Arab Palestinians.
America lies when it says it is the home of the free...when actually America supports every fascist dictatorship that crushes freedoms...Exam ples: Shah of Iran, Diem in Vietnam, military junta in Guatemala,
Pinochet in Chile, Saddam in Iraq, Samosa in Nicaragua, Charles Taylor of Liberia.
Would you rent a home from the corporate criminals who caused the world wide economic meltdown?
Will you allow your tax money to go again to subsidize criminal banks?
+17 # 2012-01-15 09:31
The other side of the coin is the homeowners. Save every bit of ;ega; paper you get concerning your home loans. I am planning to win my case against the bank/FDIC included due to my catching some fraudulent errors in my mortgage. My lawyer plans to win me my house, at the expense of the bank with their shoddy work.
+17 # jon 2012-01-15 09:59
Artificially induced banking cycles, so the ultra-rich can buy cheap and then sell dear, have been around since time immemorial.

The only time in history that the size of the up-down swings was flattened out any at all, was during the period between FDR and Ronald Reagan.

Until we get a rock-solid Democratic majority and are able to re-establish real banking regulation, we will continue down this "sheep being shorn" path.
+11 # elmont 2012-01-15 10:22
This piece could use some editing (there are small punctuation errors, and I feel compelled to note that it's "principal," not "principle" on mortgages that might be reduced to fair [market] value). I know, I know, I've been told already that I'm an pedantic dork; so feel free to save your negative comments.
Otherwise, I find this column to be both informative and thought-provoki ng... and an interesting counterpoint to the piece I read yesterday on rsn by Bruce Judson ["The Foreclosure Crisis: A Government in Denial," from New Deal 2.0]. I guess we can all agree that the housing mess is a substantial drag on multiple indcators of economic health (personal wealth/equity, job mobility, consumer spending, saving, even the sense of economic security or wellbeing). What we cannot agree on or figure out is what we should do about it. I agree with the authors of both articles, though, on the importance of the problem and the primary importance of fixing it.
+17 # mwd870 2012-01-15 10:36
"Why would congress want to take on more risk when they can keep millions of people in their homes by simply reducing the principle on their mortgages to the present value of the house? Naturally, the losses would have to be absorbed by the banks who - by everyone's admission - were responsible for the present crisis due to their lax lending standards and, oftentimes, fraudulent behavior."

Bernanke needs to be replaced. This really reflects badly on the Obama Administration. No more bailouts for Wall Street - if the media would make a serious effort to inform the public, "what Bernanke wants" would be
unacceptable. Yes, the banks should be forced to absorb the losses caused by their own malfeasance. I thought this was one of the principles of capitalism.

Enough with corporate welfare. Congress and the Administration have no right to stick this to the taxpayers again.
+18 # Lolanne 2012-01-15 10:41

Not another penny should go to "bail out" these !#$%!!@** crooks. These banks must be made to eat their losses, and the criminals that run them must be prosecuted with vigor and enthusiasm. I am sick to death of these schemes that stick it to the public in order to rescue the slimy low-lifes that caused the whole housing disaster to begin with. NO, NO, NO, NO, NO!
+13 # Transparency 2012-01-15 11:23
It is ludicrous to financing the large corporations, to buy the properties in bulk, to rent to the people destroyed by the large corporations. Why not finance the renter directly? If the renter makes timely payments for 2 years and have the income but not the credit to buy a home, you have now lifted people back out of the gutter, that corporations put them in, with deplorable MBS tactics and moving their jobs over seas. Speed, lack of ability to lead, and more gifts for the corporations is not the solution. This is a no brainer, rent with option to buy for people with damaged credit but that have income. The 99% sitting in the street would be blown away to see the government do something so simple that works! See this as an opportunity to return every body to a home not to give more gifts to large corporations. When are you going to incorporate your first creative solution that includes those that are sitting in the streets screaming out for help? Please stop destroying our country and taking away our middle class with bad programs like this.
+8 # jwb110 2012-01-15 13:23
The Stock Market is just a version of Las Vegas. If a person drops 4.25 in a slot machine in Vegas and loses the Casino owner doesn't give him his money back. The same should be true of Wall Street. If they make an investment, " a bet", on something and they loses then they should just accept it and take the hit. If there is no punishment, having to take the loss, for bad behavior in the Stock Market then self-regulation (ha-ha) will never happen. Having to take the loss is the self-regulation.
The Fed and The Financial Industry and the mouthpieces for Corporate America in Washington are setting this country and the world up for another Marxist Revolution. They just cannot keep themselves from killing the goose that laid the golden egg.
+6 # jimyoung 2012-01-15 20:07
Was it on Moyers where I read the OWS sign that said the economy isn't broken, it's FIXED.
0 # jimyoung 2012-01-16 12:46
My homework will include some reading.
and my brother's classmate's "Conservative Intellectual Movement in America Since_1945" I'll read them with a Devil's Advocate approach to try to see where theory and reality become disconnected.

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