The greatest theft in American history
In the past, I have repeatedly talked about the perverse role the US government plays in the domestic housing market, through government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, which have total mortgage portfolio's of between $5 trillion and $6 trillion on their books, as well as an unknown amount and degree of "involvement" in mortgage-backed securities, and whose common and preferred equity were recently assessed as "worthless" by an analyst team at Keefe, Bruyette & Woods. Which of course only confirmed a poorly hidden secret.
The KBW analysts concluded that the only way to deal with Fannie and Freddie would be a bad bank construction. The government, however, as I’ve pointed out before, seems to be ahead of them. A rapidly growing share of mortgage loans are now processed through the Federal Housing Administration (FHA) and the Government National Mortgage Association (GNMA, a.k.a. Ginnie Mae).
Unlike Fannie and Freddie, these are full-blooded government-owned agencies. And that makes them even easier tools to manipulate the housing market. Ginnie Mae guarantees mortgage-backed securities backed by federally insured or guaranteed loans issued by the Federal Housing Administration. In other words, the government guarantees securities backed by loans issued by the government. These loans, however and of course, don't originate with the government.
Earlier this week, a story made the rounds of a 20-year old girl of Salvadorian origin who holds 3 jobs and bought a $155,000 home (and got a $34,000 "embellishment" extension on top of that) with an FHA-guaranteed loan with a 3.5% down payment. That story had subprime written all over it right from the start, and loudly begged the question what on earth moves the US government to move into (make that induce) subprime lending.
But that was just the first chapter of the tale. In chapter 2, we see that the damsel in distress didn't just see her loan guaranteed by the Obama administration. Crucially, she also qualifies for the $8000 tax credit for first time home-buyers.
Please pay attention. Now it gets interesting.
$8000 may not seem like a lot compared to the $155,000 purchase price. But that's not the way to look at it. You see, the government allows those who qualify for the credit to use it towards their down payment. And now the picture changes dramatically.
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