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FHA meltdown...why aren't things improving, part 3

The Whitehouse, rather reluctantly I think, admitted that deficits would increase to $9 trillion from the originally projected $7.1 trillion dollars. The media is, almost ecstatically, reporting that home sales are dramatically improving. Mortgage Delinquencies have reached the highest percentage of active mortgages in history. Texas based Guaranty Bank failed in August, the third largest failure in 2009. It was purchased by a Spanish bank group within hours of being seized by regulators. Meredith Whitney, noted bank analyst and author, reported that she believes we will see 300 bank failures before the year is out. Finally, hidden from view almost entirely is an obscure report written by Ann Schnare, which identifies a serious capital deficiency brewing at FHA. Let’s begin to connect the dots.

The deficit is mushrooming. Mortgage interest rates are being artificially restrained by Federal Reserve Bank purchases of mortgage backed securities.  Home sales have improved, but beneath the sales headlines data it is widely acknowledged that inventories are increasing and the homes sales we’ve seen, are very much driven by the Whitehouse 1^st Time Homebuyer Tax incentive. Volumes are up, but much like the vaunted Cash for Clunker’s program, there is accumulating evidence that sales volume will dry up along with the government stimulus money. The banking system is in deep trouble, still. In addition to Whitney's report, one senior Oklahoma banking executive with close ties to the FDIC has told me privately that the FDIC has targeted 400 banks for failure this year. That goal may very well not be achievable given the FDIC’s manpower resource limitations, but the number of targeted banks is not surprising. In the midst of all of this the third largest originator of FHA loans in the U.S. is seized and its servicing assets sold to Bank of America. Hidden from view is the fact that the FHA insurance fund is operating below its own capital adequacy standards. Some analysts have predicted a $50 billion dollar shortfall in the fund by the end of December. As Ann Schnare and others have suggested, the FHA model is in trouble. The FHA Modernization Act of 2008 did nothing to solve the underlying problems associated with mortgage loan underwriting standards. Business as usual was permitted at FHA following the subprime mortgage loan meltdown, and given the prime mortgage meltdown currently underway, FHA cannot get out of the way of the train that is coming. What is the government response?  Consolidate banking operations. Close as many banks as possible, as quickly as possible. Reward those entities (think Bank of America) and countries (think Spain), that support the current government’s move towards much more centralized government control, or to whom the government owes a favor. Use the current economic environment to restrict mortgage loan origination to the operations of those banks that have been chosen to survive, and that specifically means those banks with the closest ties to the government bailouts and consolidations.  Effectively this means eliminating mortgage brokers and mortgage bankers whose business purpose is not closely aligned with the government’s future blue print for real estate finance and ultimately home ownership.  Clearly, the historical model involving Fannie, Freddie, and FHA, combined with Wall Street purchases of securitized mortgage portfolios has failed. It cannot be revived in its current form. The government must keep the system running long enough to set a new course. Purchasing mortgage backed securities that were  previously sold to other countries and institutions as fallaciously rated Triple A securities, allowing FHA to insure marginal mortgage loans, and continuing to prop up Fannie and Freddie in the face of continued losses is all evidence of this. The government has another plan, and like the health care plan, it will entail government directives that determine who can qualify for, and for what kind, of home ownership. The government believes it has no choice but to attempt to make itself the provider and controller of access to home ownership and the financing of real estate,  as it has to the automobile industry, the banking industry, the insurance industry, and the health care industry. So, ultimately, the reason for so little press coverage of the TBW seizure and the FHA performance problem is because the press is unwilling to expose the government’s agendas for what they are: A movement toward socialism and government control of critical economic functions previously directed more or less by free market forces. No surprise is it?