Tag Archive | "Wells Fargo"

The FHA Bailout for Banks: New Government Guarantees By Expansion of FHA Loan Modifications


WTF Finance reported how the proposed solutions for dismantling Fannie Mae and Freddie Mac involve more Government. The two Government Sponsored Enterprises guaranteed trillions of mortgage debt and were bailed out by the U.S Government while continuing to guarantee non-sense loans making up most of the lending environment post-Real Estate bubble implosion.

In August 2010 the U.S. Department of Housing and Urban Development (HUD) announced a new program that would be implemented to help the responsible homeowners that did not fall behind on their mortgage. The NY Times now reports how a significant number of lenders have signed up for this program.

“Six months after the Federal Housing Administration announced an $11 billion refinancing initiative for these “underwater” borrowers, nearly two dozen lenders have agreed to take part in a new loan modification program.

To qualify, homeowners must be current on their monthly mortgage payments and not already have an F.H.A. loan. The size of the new primary loan cannot be more than 97.75 percent of the current value of the property; refinanced loans for homeowners whose properties carry second liens cannot exceed 15 percent of the property value.”

According to the official HUD announcement the qualification criteria are:

HUD logoThe FHA Short Refinance option is targeted to help people who owe more on their mortgage than their home is worth – or ‘underwater’ – because their local markets saw large declines in home values. Originally announced in March, these changes and other programs that have been put in place will help the Administration meet its goal of stabilizing housing markets by offering a second chance to up to 3 to 4 million struggling homeowners through the end of 2012.”


According to the NY Times article participating banks in the FHA Short Refi Program include: Wells Fargo, Ally Financial (formerly known as GMAC), Wall Street Mortgage Bankers of Lake Success, NY; 1st Alliance Lending of East Hartford, CT.; Nationstar Mortgage of Lewisville, TX.; E Mortgage Management of Haddon Township, NJ.; and Glacier Bank of Kalispell, MT. 23 more lenders have signed up for the program according to HUD that estimates that approximately 500,000 to 1.5 million homeowners can benefit from the program.

This program illustrates that the Government has absolutely no plans or intention to exit the credit markets and reduce its guarantees on home loans. This week Treasury Secretary Geithner stated before the House Committee on Financial Services that he wants to reform and reduce the role of Government involvement in the credit market and allow for the private lending to make up a majority of real estate lending.

“The Administration is committed to a system in which the private market – subject to strong oversight and strong consumer and investor protections – is the primary source of mortgage credit.”

WTF Finance would like to point out that these promises are merely promises to please international investors and provide them with misplaced confidence that the United States is addressing the root of our economic problems and therefore can balance its budget in the future. This HUD program is an expansion of FHA guarantees. The U.S. is not serious about changing its involvement in the credit markets as it otherwise would not have continued to guarantee non-sense loans that no private entity would have made. To give banks the option to take a modest 10% loss on their non-guaranteed underwater mortgages in exchange for Government guarantees on future losses that could far exceed the 10% write down is all but a sign that the Government is willing to exit the credit markets. This is an insurance policy whereas the banks don’t pay the FHA any insurance premium.

The smaller banks that are accepting to take the 10% write downs are making themselves more attractive to a future takeover from a large financial institution as their loan portfolio is now guaranteed.

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Inside The Bubble Economy


When Federal Reserve and Government officials reasoned that lessons were learned from the credit bubble the editors of WTF Finance laughed in disbelief. Home prices might have dropped in many areas of the Nation but Government and Fed interference halted the decline in an attempt to re-inflate the bubble. The result is a continuation of irresponsible behavior that is being encouraged and subsidized by the various policies and economic markets that do not reflect reality.

While many politicians argued that lending standards improved and now reflect the risk variable, it was obvious then as it is now that credit didn’t significantly tighten. Irresponsible lending habits still continue as the Federal Reserve and US Government guarantee non-sense loans at below true market rates. The one crucial element that brought us the recent market rally since Spring 2009 was the changes in accounting regulation that eliminated mark-to-market accounting standards. Mark-to-market accounting ensures that assets and liabilities are accounted for according to their current market value.


Artificial low interest rates by the Federal Reserve and home loan guarantees by the Government through FHA, VA, and USDA allowed for the credit and housing bubble to reach the height that it did. Throughout the housing bubble the Government continuously increased the conventional loan limits that it would guarantee, allowing individuals to increase the debt burden they could take upon themselves. This of course was done under the pretense of making homes more affordable when nothing but the opposite is true. Artificial low rates that did not reflect a balance between supply and demand but instead are just an arbitrary number set by the Federal Reserve, amplified the ability to qualify for even greater debt. The resulting increases in home prices were not based on fundamentals but anti-free market policies that brought us a real estate bubble with values beyond affordability.

With the stock market dropping in value various lawmakers argued that mark-to-market regulations were to blame as companies had to write down their losses to the current value of those assets and liabilities at that time. With mark-to-market regulation in place, financial institutions such as JP Morgan, Bank of America, Citi Financial, Goldman Sachs, Wells Fargo, etc. had to realize their losses on their balance sheets making them in essence insolvent. Not as a result of mark-to-market regulation but as a real reflection of their financially irresponsible business decisions.

With the passage of the various bailout bills, supported and voted for by both political parties, mark-to-market accounting regulation became a norm of the past. Financial Institutions quickly adapted and posted record profits as they took the previously marked down losses and restated them as gains, allowing for business to continue as usual.

The Federal Housing Administration continues to guarantee loans at questionable terms with only 3.5% down payment, VA continues to guarantee loans of up to 102%, and the USDA made a serious effort in 2009 to increase home ownership in rural areas with a population of less than 25,000. The New York Times reports in its article “Auditors See Rising Defaults In Rural Loans”

“The response from lenders was immediate. The value of federally backed rural home loans soared to $16.2 billion in fiscal 2009, up from just $3.7 billion two years earlier. Last year, the guarantees reached nearly $16.8 billion.”

Auditors now come to the realization that a significant amount of those loans that were guaranteed in 2009 present the next wave of defaults. Tammye H. Treviño, administrator of the Rural Housing Service, acknowledges the lending program’s problems yet states

“At a time when new-home construction and home sales in rural America were struggling, we continued to make loans.”

This quote highlights exactly what WTF Finance has been stating. Government and Federal Reserve Policy are not solving the problem but merely delaying the inevitable consequences that are growing bigger in size. The current policies are solely attempting to cover the symptoms of the root problems that their anti-free market policies created.

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The Non-Foreclosure Crisis


The Supreme Court of Massachusetts upheld a ruling of a lower court, siding with the homeowners that financial institutions Wells Fargo and U.S. Bancorp did not have the proper documents to foreclose on the homes.

The missing paperwork in question is the “note” to the loan. The “note” is to the mortgage what the “pink sheet” is to the car. It is proof of ownership to that debt. One might ask why a financial institution would miss this crucial document that was signed by the homeowner when the mortgage was taken out to finance the home purchase or refinance an existing loan at better terms. The answer to that question lies in the complexity of the mortgage securitization process and the fact that loans have been bundled and sold to investors numerous times. In the process financial institutions have lost track, or at the very least, temporarily misplaced some of those crucial documents. Despite not receiving payments from the homeowners, the court has ruled that without the “note”, the financial institutions have no right to foreclose and those foreclosures should be void.

While we do not disagree with the court that the foreclosing entities should have proof of ownership over the financial debt, the inability to present the notes is another crisis in the making. Since the MA Supreme Court has ruled against the financial institutions, it will provide incentive for millions of homeowners across the Nation to halt their foreclosures in an attempt to delay the inevitable or reverse the foreclosure altogether.

How will this affect the Real Estate market?

Contributors to various blogs already suggest individuals stop making payments with the hope that the owner of their mortgage lost documentation of ownership for that debt. There’s no doubt that this ruling will delay existing foreclosure proceedings and consequently further skew the demand-supply variables of real estate economics. The change in accounting regulations from mark-to-market to mark-to-bubble already manipulates these variables as financial institutions opt to not foreclose on delinquent loans in order to avoid realizing losses across their entire mortgage portfolio. The addition of this ruling further eliminates foreclosures and acts as another artificial mean to support home prices. The Massachusetts Court ruled against the banks but the outcome might very well serve the interest of the banks’ inflated balance sheet.

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