Washington's Financial Voodoo

Get this, seven and one half years into the neoconservative administration that has NEVER turned down an opportunity to spend money that they and their the fearless leader don't have, the gang in Washington is sending the Housing Fix It Bill to the president for his already guaranteed signature.

This masterpiece of subterfuge called legislation, promoted by Congressman Barney Frank (D) was fundamentally written by his friends at Bank of America (BoA). Remember, Bank of America bought Countrywide and immediately fired seven thousand employees, and as of yet, has refused to reveal the true financial position of this pig.

The crew at BoA has been fiercely lobbying Mr. Bernanke and Mr. Paulson for their own bailout program modeled after the JP Morgan / Bear Stearns midnight fleecing of the taxpayers. Hence this wonderful bill.

So far, from what we can see those poor hapless homeowners that are facing foreclosure because they go into loans that they now can't afford will now supposedly have an opportunity to refinance with the FHA mortgage insurance plan.

We've seen the basic rules and it looks to us like this is another version of the Washington shell game because the deal requires the homeowner to refinance for 90% of the original loan amount. Now, this doesn't seem to make much sense if the property is now worth 20% to 40% less than the original purchase price and was purchased with 100% financing.

For example: If the house was bought for $300,000 with a 80% first loan of $240,000 and a 20% second loan of $60,000, your friendly bank (BoA?) will be happy to refinance you into a FHA insured loan (30-year rates are now close to 7%, but wait for the zinger!) for 90% of the original amount or $270,000, (here comes the first zinger), but, the house is only now worth $260,000 (a 20% drop), so the homeowner will have to come up with the missing $10,000.

Now, how many homeowners that are facing foreclosure have an extra $10,000 to throw into the fire?

But, wait a minute, there is yet another zinger. You see, the FHA is what is called a self-funded agency. This means they charge for their services to pay their ever increasing bureaucratic costs of operation. The bill gives the FHA the ability to charge 3% of the loan amount as an upfront insurance premium plus a monthly insurance premium. Remember, mortgage insurance protects the lender, not the homeowner, in the event of a default by the borrower.

So, in our above example, the homeowner now needs another 3% or another $7800 to get this great deal. Oh, and we haven't mentioned loan closing costs. By our calculation, the new deal will end up costing the homeowner more per month, and will saddle them with a still upside-down mortgage.

But wait, if the homeowner can't handle this, your friendly bank will suggest that you roll the costs into your new loan, and to keep your payments down, that you take a 5-year adjustable since that rate is still in the low 5% range. Can you spell swindle?

Nice going Barney, you've just demonstrated that it takes a politician to really screw things up and tht you will continue to dig us deeper into this multi-trillion-dollar hole.

The grown-up thing to do would be to confess that we have created this problem, and then bite the bullet, take our medicine.

When those folks who are supposed to steward our nation’s money fail to act as adults, when blue-chip CEOs, megafund managers, investment bank managers and Washington regulators put off, deny and blame, their prominence magnifies these human flaws to awesome economically threatening proportions.

Right now in Washington, they are blaming:
“It can’t be our fault that banks are failing. SOMEONE did SOMETHING bad. And that someone must be punished!”

For decades, Washington has allowed the big banks to run rampant. In the name of “deregulation,” they allowed them to lend money to folks without jobs. They allowed them to bundle that paper into junk bonds. And they allowed Wall Street to buy and sell those bonds as if they were genuine gold certificates.

And now the whole deal is collapsing like the house of cards it always was.

These guys played a fool’s game, and anyone who got sucked in to their “free money” scam could be said to deserve their just deserts.

If you “buy” a house with no money down and pay only interest, then you cannot complain when you have to leave it behind. It was never really your house. You had no equity interest. You were renting!

If you buy a trillion dollars worth of bonds without truly understanding that only the top third had any real defined value, then you are a fool who deserves to be bankrupt.

If you lie about it, you should be punished. There are ample laws already on the books pertaining to frauds of this nature.

If you claim to be a libertarian, to "allow the free market to act on its own"; then you must accept when it acts badly. Sorry about that, Larry Kudlow and Steve Forbes. Please stop your incessant whining for government intervention.

Unfortunately, we are human, and are not content to reap what we have sown. And so, on Bloomberg, CNBC, and in Washington, they deny, call for quick fixes, and blame.

The rate cuts failed. Rather than rescue the economy, billions of “free dollars” given to the hedge funds and investment banks have pushed inflation to its fastest yearly rate in more than two decades so they again could reap huge profits.

The rebate checks failed. June’s tepid 0.8% retail sales gain is a farce, comprised entirely of higher gas prices.

And the bailouts are failing. “It’s just Bear Stearns, really! Oh wait, maybe Lehman, too. And Indymac. And Fanny Mae and Freddie Mac…” Who is next? (Hint - watch the banks.)

So now they threaten and blame while terrified depositors in line at bank branches were threatened with arrest if they did not accept that they could not access their cash.

In Washington, SEC Chairman Christopher Cox is heaving about subpoenas in an attempt to find out who “talked down” the quasi-federal mortgage banks over the weekend rahter than fessing up to the truth that he hog-tied all the SEC regulators and investigators (except for the ones he forced out) after taking over for the visibly hapless Harvey Pitt.

We don't need a fortune telling gypsie to tell us what is going on here, do we?

And if that doesn’t stop the bleeding, Mr. Cox has implemented a ban on selling Fannie, Freddie, and shares of his other favorite (well connected?) companies to drive the stock markets up without rational logic. Because “it was those evil naked short sellers who brought us low!”

Right now, all the politicians are doing is digging the hole deeper, pushing the inevitable day of reckoning further out into the (we think near-term) future.

It is going to be a massive hurt to dig us out of this mess.

In the meantime, you will only see more failures, more layoffs and more losses. If you are politically inclined, you might care to tell someone in Washington to suck it up, get on the stick, quit whining and blaming, and start digging us out. This means stop spending, cutting budgets, and eliminating pork and stupid subsidies. (Fat chance this will happen! But, I'm trying to be an optimist.)

Hunker down and watch out for the first ever default on USA debt coming soon to a political theater near you.

The Best Money Guy