Housing Bail Out Part Deux: Just Another Financial Con Job


Last night I wrote about the Obama Administration’s housing bail out. But, I hate to say, there’s more to tell you – and it’s actually worse. In addition to the giveaways to mortgage holders, we also have to consider the federal government effectively offering to give a credit default swap (CDS, remember those?) to the banks. If one of the lucky homeowners that get a loan modification defaults on their mortgage because home prices fall again in the future, the federal government will make good to the bank for them. There are some differences between this and a real CDS, though – the banks won’t have to pay a premium for the insurance. The federal government is selling CDS for $0. Nice. We taxpayers are putting up $10 billion for this piece.

Then there are the plans to “Support Low Mortgage Rates by Strengthening Confidence in Fannie Mae and Freddie Mac.” There’s that word again: confidence. In a con game, the con man isn’t the one who is confident; he is the one who gives you confidence. You are so confident that you are making a good decision that you give him all your money to be part of his scheme. If you still have any questions about confidence schemes, watch “The Music Man” again.

The Treasury nationalized Fannie and Freddie (F&F) last year – they are now owned by the federal government. If you need more “confidence” than that in the strength of F&F then you should consider moving to another country. Under the assumption that “too big to fail” makes sense, the new Bailout plan is increasing the size of F&F’s mortgage portfolios by $50 billion – along with corresponding increases in their allowable debt outstanding. This part of the Homeowner Affordability and Stability Plan will cost $200 billion, an amount that goes beyond the $2.5 trillion cost of the Financial Stability Plan and the $700 billion in the Emergency Economic Stabilization Act/TARP and the $800 billion Stimulus Plan. The new $200 billion in funding, according to the Treasury’s plan, is being made under the Housing and Economic Recovery Act.

If you can remember back that far, the Housing and Economic Recovery Act was signed into law by the former and largely unmissed resident of the White House back in July 2008 to clean up the subprime mortgage crisis before any of the other bailout money was committed to clean up the subprime mortgage crisis. This legislation established the HOPE for Homeowners Act of 2008 which spent $300 billion to (1) insure refinanced loans for distressed borrowers, (2) reduce principle balances and interest charges to avoid foreclosure, (3) provide confidence in mortgage markets with greater transparency for home values, (4) be used for homeowners and not home flippers or speculators (5) increase the budget at the Federal Housing Administration so they can monitor that all this happens, (6) end when the housing market is stabilized and (7) provide banks with more ways and means to stop foreclosing on delinquent homeowners. Three million homes were foreclosed last year despite this legislation or any of the other bills that passed before and after it.

Each new bill carries with it an increase in the limit on the national debt. The most recent Stimulus Package increased it from $11.315 trillion to $12.104 trillion effective February 17, 2009. The actual debt is currently at $10.8 trillion and rising. With only $1.3 trillion between the actual debt and the limit, Timmy Geithner’s pals back at the Federal Reserve will have to keep the printing presses running overtime.

The “new” Homeowner Affordability and Stability Plan is just a rehash of every old financial sector bailout plan. The definition of insanity, according to a quote attributed to Albert Einstein, is doing the same thing over and over again and expecting different results. Here we go again.

Susanne Trimbath, Ph.D. is CEO and Chief Economist of STP Advisory Services. Her training in finance and economics began with editing briefing documents for the Economic Research Department of the Federal Reserve Bank of San Francisco. She worked in operations at depository trust and clearing corporations in San Francisco and New York, including Depository Trust Company, a subsidiary of DTCC; formerly, she was a Senior Research Economist studying capital markets at the Milken Institute. Her PhD in economics is from New York University. In addition to teaching economics and finance at New York University and University of Southern California (Marshall School of Business), Trimbath is co-author of Beyond Junk Bonds: Expanding High Yield Markets.

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You say that the first bailout you mention didn't work. Is that because few people used the money or because it was used but didn't stem aggregate foreclosure activity?

In a nutshell, how is the second package different from the first?

Further to what didn't work

Senator Martinez (R-FL) discussed some of the reasons that Hope For Homeowners didn't work in his opening comments to the hearing today. Transcripts aren't up yet, but watch this site tomorrow for a copy of his comments: http://banking.senate.gov/public/index.cfm?Fuseaction=Hearings.Detail&He...

One thing that stands out: 50% of foreclosures are coming from private mortgage servicers, yet they issued only 15% of mortgages. These companies are making the choice to foreclose instead of modify loans. Did you read my earlier piece on CDS? Or check this Village Voice article on why it may pay more to foreclose than modify:

Re: Question

In a nutshell, item (5) of the first package wasn't mentioned in the second package.

It's harder to answer your first question. There is so little accounting for these activities that it is difficult to tell what was done or not done. Either way, it didn't seem to work.