Reader's Comment on Fannie Mae Shenanigans

Here is a comment from an anonymous writer to my blog (see post from February 11). Although it is anecdotal, the general validity of what is going on, has come to my attention from several other sources. This gentleman took the time to write, and unfortunately, the remarks section of my blog gets passed over by a majority of viewers. So here it is, in case you missed it.

Anonymous Feb 29th “In Obama’s Plan to save the homeowner.”

Due to job transfer, I'm trying to buy a house in Oregon (Portland metro). Fannie/Freddie/et. al. are trying to "stabilize" prices by offering homes above market and refusing to negotiate. To lure in buyers, they offer 0% down, no closing costs, no appraisal loans. Sound familiar? HAFA short sales dictate price, but pay the seller cash to move out and offer deed in lieu if the short sale doesn't work out. And Fannie/Freddie/et. al. don't disclose serious defects. I tried to buy a Fannie home - turned out to be in a flood plain - no disclosure. So the house goes in and out of contract, with Fannie hoping to find the sucker who doesn't discover the flood plain. If they wait 'til summer, when the waters recede until next winter, they'll probably get their wish. Kicking the can, indeed.

Meanwhile, Realtors are back to their old games. Every property "has an offer coming in," and agents swear that most houses sell within 2 days of list unless they're seriously defective. Half the inventory is short sales. There's another 100% of current inventory somewhere in the foreclosure process.

The risk in a low-rate environment is that buyers generally buy on payment - when rates rise, payments have to rise or prices have to fall. 4% mortgages are far below historic norms. We are creating a new generation of underwater homeowners, with NAR collecting their 6% tip as the housing Titanic takes on water. Low rates are a godsend if you're going to stay put for 30 years, but the average homeowner will be short-selling in 7 years when rates revert to normal and salaries haven't kept pace with rising rates and inflated home prices. How long can the 3% loan keep the ship afloat? I am actually hearing agents repeat 2006 asking prices (so high that houses didn't sell even in the greed bubble of 2006!) and saying "look what a bargain it is now!" Are buyers still that stupid?

Here is a Previous Post of mine, from a few years back, that shows that the predatory animal (Fannie Mae) hasn't lost its touch! Buyer beware. They are going to give you the deal of a century----the one that nobody else wanted!

A hat tip to the anonymous author.

Bernanke Laughs All The Way To The Bank Printing Press

Just listening to Fox news:

Oil companies are making money and gas prices are going up. Will the consumer revolt and stop buying gas to teach the oil companies a lesson?

The implication there: “It’s the damn oil companies gouging us, let’s rally around the flag and punish them Rah! Rah! Rah!” Meanwhile Ben Bernanke slides another trillion dollars of printed money into the economy. If you look at oil and gasoline prices in terms of gold and silver prices they haven’t changed much in the last 40 years. Here is a LINK to a Forbes article that should raise your awareness level a tad.

In actuality, the purchasing power of the dollar has fallen 50 percent in the last four years, gas hasn’t doubled in price. Put another way, this was a tax on people with money in the bank; their money lost half of its purchasing power. The Democrats want to tax the rich; I think they are doing an excellent job at it right now. It now takes two billion dollars to buy what one billion bought four years ago. And of course if anyone complains, it’s those damn oil companies gouging us. Plus those rich people weren’t using that second billion anyways, so they’ll never miss it. If you’re rich and retired, just call it “Tough Love.” Our government needs those printed dollars to pay the bills when tax receipts are just not enough to cover expenditures.

Printing dollars, taxes the people with money in the bank invisibly. There are no forms to fill out, everything just costs more. The average person on the street has no concept of printed dollars creating inflation. They want to blame someone for the increased prices, and who do they point to, the supplier of the product, the bankers, and Wall Street.

Some of us know what is going on. The real evil is government printing; they are taxing those that decided to save for retirement. If you have no savings, you have lost none of your wealth. If you work, everything cost more, and without a pay raise, your standard of living suffers.

With interest rates so low, there is no incentive to save. The present increase in consumption is a common sense reflex to very poor interest rates, coupled with inflation. Why wait to buy? It will cost more later! The economy isn’t turning around; this is the last breath before the long pause and downward plunge.

Is the stock market going up because the economy is getting better, or is it because stocks are the only game left in town? There is a big surge into dividend stocks, I wonder why????

Gasoline prices just went up another 25 cents over this weekend. Will Congress do to the oil companies what they did to the Post Office (limit price hikes to inflation)? Instead of the refiners shipping half of their production overseas, they’ll ship all of it. No pay, no play.

When we tax by inflation, we do unquestionable tax the rich. But ask yourself a few questions about this hue and cry to "Tax the rich." Are there many rich people between the ages of 1 to 20? Are there a lot between the ages of 20 and 40? How about between the ages of 40 and 50? Probably most of them fall between 50 and 65 just about at the age people start to get ready for retirement. How did they get rich? They saved for a lifetime. Now Bernanke is going to punish them for being rich---zero interest on their savings and inflation beyond their wildest dreams.

Inflation is kind of like sawing a quarter inch off of grandpa’s walking cane each month. He’ll know something is not right, but he won’t have the foggiest clue as to what the problem is.

Gas Prices are Increasing--Why???

Somehow the data is getting a little out of whack. Gasoline consumption in the US has decreased markedly. See the chart below. The last two dots tell it all.

This would lead one to believe that oil producers have cut production to keep prices from falling. Less gas is being sold, that implies less oil is being pumped out of the ground. There is one problem, the oil producers have grown accustomed to a lifestyle that did not anticipate cuts in production. Pumping less may keep the price high, but it won’t pay all of the bills.

The last time this happened, the OPEC cartel set quotas for each county, to keep the price of oil from dropping. It didn’t work, the price per barrel of oil fell off of a cliff. Officially, everyone was producing what they were allotted (and a little more on the side that no one knew about).

Prices are rising at the gas pump (4 dollars a gallon today), consumption has dropped and there is very little indication that the oil producers have cut production. It’s a given that refiners are only going to buy as much oil as they can expect to process and sell, while oil producers will tend to pump as long as they can sell their forward production into the futures market. There could be a meltdown in the oil commodities futures pit sometime in the near future.

There is one other possibility; Obama and Bernanke are printing dollars 24/7 and turning our currency into funny money. Below is how it turned out, once upon a time, long long ago . . .

We could be here. Early 2012 is just like early 1922.

You'll wish you had Obamacare if we get to here!

The only drawback to the opiate of printing money, is trying to stop. Either path is possible, my crystal ball is a little to foggy to see clearly. One sure thing, a fifty dollar bill won't fill my gas tank anymore.

Obama's Plan to Save the "Homeowner" (Note Holder)

Obama and his minions are going to save the underwater home owners. Below is a graph of the distressed home owners from 2006 to the present. 29 percent of these people owe more than the house is worth.

The banks in 2006 were writing loans to anyone who could fog a mirror. An in essence, every loan they wrote was a winner even if the borrower defaulted; the house was worth more than the original note. The banks were nothing more than a machine, taking depositors money, writing a loan, paying the seller his cash and then selling the note to private investors. Repeat cycle again. I wrote a letter to the head of Federal Reserve Allen Greenspan in 2005 complaining about it to no avail (see this link from August 28, 2009). The problem was obvious, home speculation was more profitable than working for a living.

So if we examine these underwater buyers, the phrase comes up “no skin in the game.” Most of these underwater owners had very little or nothing down. The person who made out like a bandit, was the seller, they got cash on the barrel-head. All the new owner did was sign a piece of paper and he was handed the keys.

The phrase “Strategic Default,” is the educated solution to the problem of being underwater. Don’t pay. Pocket the mortgage payment and move when evicted. Many defaulters maintain, “The banks shouldn’t have loaned us the money in the first place.” So better terms and free money from the Federal government are not going to turn their lives around. The average homeowner moves every 5 years and it’s about that time again.

The real question you have to ask is; who is the Obama administration helping, the home owner under water or the “private parties” who hold the notes? The home owner can ride rent free on the home now for almost 2 years in California and in places like New York for a lot longer. We hear the phrase “the poor underwater home owner.” I just don’t see it, the guy bought something for nothing and has decided he paid too much and will walk.

Fannie, Freddie and the FHA, hold a majority of the foreclosures. If marked to market at existing sale prices, they have about a 20% loss. The loss would probably approach 70% if markets were allowed to find their own bottom. Instead of an 800 billion dollar taxpayer bill, it could end up costing many trillions of dollars. The neat thing about letting housing prices hit bottom, our kids could afford to buy a home again.

Just who holds the debt? The banks drop out of the equation. They write home loans and sell them, but they do tend to get nailed on commercial loans. The banks usually have to hold 5 year construction loans, and this is probably what has gotten many a bank in trouble the last three years where the Fed has had to bail them out.

It’s the private investors that hold all of this real estate paper. Insurance companies, mutual funds, and Retirement plans come to mind just to mention a few. These fund managers are wondering where the monthly income they were counting on has gone to? No worry, it's all guaranteed by the taxpayer.

The humorous thing about this whole mess is that the Congress back in the 1930’s passed legislation to prevent this from ever happening again. Then from 1990 to 2003 we got rid of those safeguards. We were smarter now and knew what we were doing. Congress is now replaying the same 1930’s script. Let’s lock the barn door. Why? ---- There is nothing in the barn! Do we really need to protect the consumer? He’s the one who created this mess when he decided to buy a house and get rich. Of course we can wrongly blame the Banksters and Wall Street for our predicament. They supplied the clearing house to securitize our borrowing. But it was individual greed that got us to where we are now. The government couldn't stop you from buying that house in 2006 anymore than they can force you to buy one in 2012.

It’s a little like the problem in Greece, the European countries are not trying to help Greece get out of debt; they want to get paid what they are owed and kick the can down the road a bit further. The only trouble, the can has gotten bigger and heavier--it doesn't kick like it used to.

The Calm Before The Storm

For the last month or two the world has been on pause. The Greek crisis is still there, Portugal is closing in on BK, and there is a solution being worked out. Deadlines come and go and still no real solution.

FHA, which is about to join Fannie and Freddie in bankruptcy, is still offering great home deals; a friend of ours is buying a 555K home with a 3 ½ percent down payment out here in California. A coworker yesterday showed me a 343K REO home that he was bidding on. It was offered by the bank and since there are 5 other bidders, he’s bidding 383K on it. If it was me, I would have bid 300K and if I didn’t get it, I’d bid on the next one. The only trouble is, very few Realtors want that sort of a client. You’ll be considered a waste of time.

The housing market in California is in the dumpster and everyone is oblivious to it. Prices have dropped enough that buyers think they are getting the deal of a lifetime. There is no panic, just a lot of unexplained burnt lawns and lock boxes hanging on front doors. Interest rates are at an all-time low. All the consumer is interested in is; can I afford the monthly payment? No fear yet, we have yet to hit the lows where panic selling begins.

The real thing to look at is the cost of money. When interest rates are low, the banks are flush with cash and no one to loan it to (or the buyer can’t qualify for a loan). When this happens, commodities take off like a rocket. Futures in gold, oil, wheat and etc. are determined by interest rates. The price of a commodity on the spot market determines the price in the futures market. So if gold is at $1600 an ounce spot, a 100 oz. future 1 year out would be spot plus interest on the value of the spot price for one year on 100ozs. So if the interest rate was 5%, 100 oz. for a year, the premium would be at least $8,000 for the contract. So with very low interest rates, it becomes very profitable to dabble in commodities that are in an upward trend.

Banks are paying zip for interest right now. And the odd thing, there is a very small spread between AAA and DDD bonds. In normal times you could see a spread of 12%. Well with the Federal Reserve guaranteeing everything, there is no risk so Triple D only raises eyebrows when it’s a bra size. The silver foxes are trying to maximize their retirement interest income with high risk investments that have very poor returns for the risk taken. We have speculators playing the commodities and stock markets. All because of very low interest rates.

With the calm before the storm, there are only two real games in town, the stock market and the futures market. As long as we have very low interest rates, look for the markets to go up. Many investors will realize that dollars in the bank are returning nothing and this will be the new sand box to play in. In the end, it plays out like the river boat in India where two star crossed lovers decided to commit suicide rather than be separated. Everyone rushed to one side of the boat to view the event and the boat capsized killing hundreds.

The mess we are facing has a high user confidence level, “I can avoid catastrophe, I know what I am doing.” It’s a little like being the driver facing a head on collision with another driver. You’re confident you can avoid the crash. You both try to turn out of the other cars path. The funny thing is, you both turn in the same direction— away from danger, to where the other car isn't, but will soon be.

The Tea Leaves Are Misleading

Unemployment is down or just maybe these people have exhausted their benefits and dropped off of the statistical charts. Consumption has picked up and maybe for the wrong reasons; immediate gratification feels better than the savings rate reward of one percent interest offered by the banks. You want to put something on your credit card, go ahead buy the Wide screen TV and pay 28% interest on the unpaid balance. Want to buy a car, there are fog a mirror loans everywhere, but the interest rates can be a little dicey.

The real question is what do we do with all of the people that were associated with the housing industry? Getting a job after being on unemployment for two years is not an easy task. At that point, reality and frustration become a part of your day to day existence. Unemployed and no job? Go to college or trade school and get that degree with government loans. If you are 62 or over consider early retirement.

Want to buy a home and finance it through a bank? Your name had better be John D Rockefeller or JP Morgan Warren Buffet or Bill Gates. The 20 percent down mortgage is still available. Nobody had 20% to put down in the bubble years and of course everyone that ever wanted a house bought one or two. Now it’s a real effort to sell a home. Of course Fannie and Freddie are still selling homes. Rumor has it; your signature is all the down payment you need.

The number of foreclosures entering the market this year range from one to three million depending on the source. Then there is also the phantom shadow inventory. If you talk to a Realtor, now’s a really good time to buy a house (loosely translated, “I haven’t had a sale in two years, am starving and six payments behind on my Mercedes”). Of course if you planned on selling your home and ease into retirement in style, things have changed a tad.

Our government didn’t save for that rainy day and now Congress can’t even pass a budget. The argument centers around, “Can we spend what we don’t have?” The Democrats say "yes" and the Republicans say "no."

We have an election coming up and the Republicans have the solution, “Try anyone but Obama.” How either party can increase the number of private sector jobs defies all logic. Governments consume taxes; they don’t build anything for consumption.

The stock market continues to go up, our retirement investments are secure, the banking system will not collapse and the housing market is as solid as a rock;>) Our present predicament, kind of reminds me of the one legged man who sold his crutches. As long as he likes where he is standing, there is no problem.

Real Estate Investment Musings

There is a lot about simple finance that ought to be taught in high school, but it isn’t. It irritates me to hear the phrase “paying rent is throwing your money away.” That phrase has sold a lot of real estate in California when in actuality renting in our area is cheaper than owning.

The basic thing that never enters the question on home ownership is the cost of money. You borrow money to buy a home from the bank. After 20 years the home is paid off and you have no more payments, Right??? You’re wrong. Take a paid off home financed for 200K. Figure interest rates at 6% not the ridiculous current 2 percent. The interest generated by 200k at 6 percent is about $12,000 a year. This is what a paid off homeowner’s hidden costs are. The cash in his home is not paying him $12,000 a year, that’s his cost of ownership plus $2,000 in taxes plus about $2,000 in upkeep. So the paid up home owner is paying about $16,000 a year for the privilege of living in that home. Divide that by 12 and you get monthly “rent” payments of about $1334 a month. Everybody pays rent.

40 years ago you might have heard the phrase, “A home is the most worthless investment you will ever make, but a necessary one.” The reason being, it was a savings plan for young people starting a family and a long term hedge against inflation. Plus it had always been cheaper to own a home than to rent. Renters paid more for the freedom to pick up and move. The real estate bubble trashed that well tested concept and replaced it with two new ones, “Real estate always goes up,” and “Buy now before you get priced out of the market.” Everyone that ever wanted a home bought one and now this bubble has collapsed leaving our government (you and me) holding the bag.

Rental real estate may again become a viable investment option in certain parts of the country. A single family home purchased for 100 times its monthly rental, should have a very nice return. For investor owned real estate, the banks want 20 percent down. A 100k home, that can be rented for $1,000 a month, will cash flow nicely. Figure a down payment of 20k plus 6k in closing. If bought right, you could take $200 a month off the top for 20 years and then after that, you’d get a retirement check of $1,000 a month as long as you own the house. One thing to realize, landlords don’t set rental rates, the market does—the higher the rate, the more months the unit sets vacant.

Don’t go to Las Vegas and buy a home in one of those 4,000 house developments that has only 4 families living in it. The current tenants are probably busy recycling the copper and appliances out of the other 3,996 homes.

Fannie and Freddie ought to be offering some good deals in the coming year. The extra dollars they give you for buying a stripped out house, you can shop Craig’s List and buy back the water heater, furnace and dishwasher.

Cash held in the bank right now is taking a real beating. As a rule of thumb, a home is the equivalent of 150 ounces of gold. Not only that, it provides shelter, is a hedge against inflation and the banks will loan you 80% of its value as an investor, more if you decide to live in it. Maybe the investment tip for the New Year is; “Buy and hold things the government can’t print.”

So in the coming year if you have an extra 25k rotting in the bank, do you buy a new car or dabble in a rental? In 10 years, your wheels will then be worth $500 or you could have had 50k in tax deductions depreciating your rental. A lot of people in this country work full time for the car industry without even knowing it. So investing 20K and waiting 20 years, do you have the time to spare? At age 65 I keep asking myself, why didn’t I buy two instead of just one when I had the time?

Common Sense Revolves Around Our Perception of the World

Conclusions are not necessarily right when everything is taken into consideration. Take the premise that warm water freezes faster than cold water. If you put two ice cube trays in the freezer, one with warm water and the other with cold water, they will both freeze at the same time. Conclusion: Warm water freezes faster than cold water. In reality, the warm water keeps the cold water from freezing until they are at the same temperature.

Now if we step forward to this tax the rich concept. Proponents state that lowering the tax rate of the rich from 90% to 20% did nothing economically to stimulate the economy. So let’s raise the rates back up to what they were and increase government revenues. The thing that needs to be examined, the rich will invest or not invest depending on the tax code laws. If taxes are 90% here, invest somewhere else.

If you examine the graph below, there is really no correlation between the high tax rates for the rich in the early 1950’s compared to present returns. The graph is flat. The rate of taxation on the rich appears to have had little effect on total taxes collected. You’d expect a dramatic drop in collections when rates were dropped.

The “ad-v” refers to ad-valorem taxes; these are real estate taxes and sales tax.

Notice the red area of the graph. This represents social insurance. Figure that the new health care provision should at least double the red values. This will increase our taxes by 25%. This won’t be a tax on the rich; it will be a tax on the poor who skip health insurance because they can’t afford it without reducing their standard of living. Of course the employer pays half of that tax doesn’t he??? If you have ever worked on a commission basis, you’ll discover that you pay both sides. It isn’t hard to figure what this new tax will cost $2,000 to $5,000 per employee. Figure more than you presently pay for private insurance.

The real problem lies in the fact that Congress may believe that raising taxes during these harsh times is a real solution. Common sense suggests this should increase taxes collected. In reality, the net result will be little change in revenue. It’s a little like that house you bought that everyone told you would never drop in value. Well it has dropped quite a bit and the property taxes on your home have dropped also. Unemployed people pay fewer taxes. So at this point raising taxes further restricts taxpayer consumption (a reduced standard of living) and Government revenues drop even further.

The Democrats want to increase taxes on the rich and the Republicans are dead set against it; the only real people it will affect are sports players and movie stars. The Republicans ought to let the Democrats win this one and let them go for it, see if the dollars roll in. It’s just political posturing on both sides.

What can we look forward to in 2012? A lot of belt tightening! A lot of political squabbling and finger pointing. An election is coming up, is Obama destined to be our Herbert Hoover? Will health care pass a Supreme Court review? Will the Euro survive? Can we increase the national debt one trillion dollars a year forever. Will civil war triumph over democracy in the Middle East? Could several States in the coming year need a Federal government bailout? I don’t mean to be pessimistic, but once we get all of this under our belt, it may be up instead of down from there.

None of our problems have been solved, they have only been ameliorated (to make more tolerable). What will happen in the coming year is veiled in uncertainty. But even so, here is wishing every reader Seasons Greetings and the hope for a successful and Happy New Year.

Guverment is goin ta fix things rite

Now the government is trying to save us with a newly created institution called the Consumer Financial Protection Bureau. It has a planned budget in excess of 300 million dollars. This is one of those” lock the barn door after the horses have run off,” programs. Why not use the money for the unemployed and food stamps? These people need hope, not protection.

Then the Obama administration comes out supporting a restriction on purchasing a morning after birth control for anyone under the age of 17, they didn’t want 11 and 12 year old girls buying them. Just how many pills can you buy on a 50 cent a week allowance? The average kid probably has a better chance of being hit by a milk truck than being knocked up at the age of 11 or 12.

Alabama passed a stiff law against illegal immigrants, now they have no one to harvest the farm crops. The argument being that the farmers will have to pay better wages to get fruit pickers. Are you going to buy 89 cent a pound tomatoes grown in Mexico or the $3 per pound ones grown in Alabama? Farm land could be a good buy in that state, as farmers go broke trying to survive. Of course when the law is repealed, those who invested in that "worthless land," will make out like bandits. Passing legislation is a little like playing chess; you have to think several moves out to make a buck. These legislators did their thinking and by all appearances, looked like they were performing a public service; they got rid of the illegal aliens and are about to pick up some nice cheap farmland to boot.

New York plans to raise 2 billion dollars taxing millionaires. How does this work? The rich people will move out of the state (to their summer homes no less). The amount that New York raises from taxing the rich, will be passed to the middle class in the form of lower tax rates. What happens when no new funds come in from expected sources? Is this where they pull the rabbit out of the hat? I just love magic tricks!

A new Nevada law makes it more difficult for lenders to foreclose on home loans in the state. 3 out of 5 homeowners are already underwater with their mortgages. Where is the incentive for the banks to even write new home loans in the state? Just draw a red line around the state, home prices could drop a lot lower now that the banks have been shown "who’s the boss." Visa and Master Card could be the only ones doing home loans in the state.

Then we have FHA guaranteed loans to help people in California buy affordable homes up to $729,000. To my way of thinking, someone buying a home a few hundred thousand shy of a million dollars doesn’t need financing help. Why not set the bar at a more reasonable level of 150K for everyone. That might kick the air out of the inflated housing market in California. These loan levels are a prime example of a government program that fails to protect the best interests of the buyer. The amounts are absurd, and no one questions them.

Governor Jerry Brown just acknowledged that the state of California has a 13 billion dollar shortfall this year. I would hazard a guess that the current budget shortfall and liability obligations are closer to 30 billion dollars. It’s a little like the political concept of being “just a little bit pregnant,” it’s just a small problem right now. Tell the voters the truth and get hung out to dry. His solution is to cut services even more and raise taxes. It seems logical. But raising taxes, will it bring in more revenue? Just look at all of the supermarkets in LA that have their warehouses in Nevada. They truck their product in 250 miles. It’s all about taxes that vary considerably from one state to another.

Most of these government programs are kind of like using a shotgun to trim your toe nails. They kind of, sort of work, but results may vary depending on your eyesight. Using government logic, not having to take your shoes and socks off to trim your toe nails is a labor saving plus.

The Tax Money Is There

Americans pay their taxes and now there are budget shortfalls. In Los Angeles, many city employees are getting 36 days of yearly furlough (14 percent of their wages are just not there anymore). Then there is the CalPERS retirement fund, which is severely underfunded (the consensus is the State of California will have to make them whole---Smoking some “Kalifornia hemp” makes this wish more plausible).

Each taxpayer firmly believes that the money is there to finance their special or necessary State programs, and the legislature is frivolously spending their taxes on something else that is worthless--- like education. This concept is set in stone, “The money is there and they won’t spend it on my program!”

Remember the old adage “the squeaky wheel gets the grease.” The wheels are starting to squeak and we’ve run out of grease. People with a programs being cut will march in protest--- This is where these many different protests combine together and turn to riots. Was it Congress that once said “Let them eat cake?” For some reason, the expression "Don't lose your head," comes to mind. Maybe a shot of Courvoisier Napoleon Cognac will help us remember what transpired in France 200 years ago.