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U.S. government the NEW sub-prime lender

Old habits are hard to break. When the NASDAQ tech-bubble burst, the U.S. government and Federal Reserve Chairman “Bubbles” Greenspan created an even bigger asset-bubble to replace it (the U.S. housing bubble). It was characterized by a 1% “benchmark” interest rate, ridiculously lax lending standards, rampant fraud – and non-existent oversight.


By refusing to allow its economy to purge itself of bad debt and excessive credit, the U.S. government created a much more damaging bubble – aggravated by Wall Street's multi-trillion dollar, global Ponzi-scheme.


With the U.S. housing market now experiencing its worst collapse in history as the aftermath of that bubble, and with no “bottom” in sight, the U.S. government is once again trying to take the easy way out – this time by trying to re-inflate the same bubble which has just burst.


This time, the Fed's benchmark interest rate is at 0%. This time, it's the U.S. government itself which has lowered the bar with its lending standards. This time there is even more mortgage-fraud (up 23% from last year) – and there is still no oversight.


At the peak of the (last) housing bubble, Fed Chairman Ben Bernanke called it a “Goldilocks economy” - where prices would simply keep going up forever. After making the worst “call” in the history of human commerce, he has been reappointed.


Timothy Geithner, the head of the New York Federal Reserve Bank (and chief regulator of Wall Street during its crime-spree) was so brain-dead that he actually testified before Congress that he “was not a regulator”. For this (as well as cheating on his taxes), he was promoted to Treasury Secretary.


Now it is the Federal Housing Administration which is handing out sub-prime loans like a financial “Pez-dispenser”. An illuminating article by business consultant David DePhillips provides a long list of ugly numbers.


  • the FHA's market share of the U.S. mortgage market has risen from 2% to 23% in just four years

  • it has a 96% mortgage-approval rate for borrowers with FICO scores of only 600

  • it has reduced the size of down-payments for borrowers with FICO scores below 500

  • it already has a 7% delinquency rate on its loan portfolio, despite the fact that most of these are new loans

  • it has become the new employer for thousands of private sector “mortgage brokers”, who were the instigators of most of the mortgage-fraud during the first housing bubble, with the number of “FHA approved” lenders rising by more than 40% since the end of 2007 – from 9,600 to nearly 14,000


If this was an otherwise-healthy market, then perhaps the FHA's reckless expansion into this sector could be seen as “support” for struggling U.S. homeowners. In fact, nothing could be further from the truth.


U.S. banks are holding millions of already-foreclosed/repossessed homes off of the market. The most recent statistics show that total foreclosures and repossessions are on pace to go well over 4 million units this year. Meanwhile, sales statistics over the last two months show U.S. “REO” (bank-owned real estate) sales will be less than 2 million units. This adds to the existing glut of 20 million empty homes.


What is worse is that the U.S. housing sector hasn't even gotten to the peak of its mortgage-resets of bad loans from the last bubble (see “U.S. mortgage-crisis to get MUCH worse in 2010-11”). This upcoming spike in resets begins next year and will continue through 2011, before beginning to tail-off in 2012.


To make this upcoming “train-wreck” even worse still, the U.S.'s spendthrift, baby-boomers are starting to retire, and their retirements are grossly under-funded – even if the U.S.'s pension system can remain solvent (see “CalPERS is unsustainable”). With real estate comprising 75% of the assets for these financial lemmings, and with these boomers needing to come up with trillions of dollars just to come close to maintaining their standard of living, there is no mystery as to what they will be selling – year after year after year (see “U.S. pension-crisis: the $3 TRILLION question”).


Adding “insult to injury”, the Obama regime is essentially doing nothing to help out the homeowners themselves – despite loud and frequent claims to the contrary. With 4 million homeowners potentially eligible for aid in his “housing rescue”, less than 5% of that number have received any formal offers of mortgage relief. Anecdotally, reports stream in on a daily basis (from both homeowners and mortgage-counselors) that Wall Street banks are sabotaging this process by frequently “losing” documentation, refusing to return calls, refusing to consider aid for some eligible homeowners, and making “modification offers” which are still far too stingy to prevent homeowner default.


In short, instead of trying to “rescue homeowners”, the Obama regime appears to care about nothing other than propping up the mortgage-debt of the same Wall Street banks who contributed more to his campaign coffers than any other U.S. politician over the last three years. Clearly Obama is earning every penny of what the banksters handed to him to buy his favor.


Now the FHA is almost broke – joining other government entities like Fannie Mae, Freddie Mac, and the FDIC. None of the hundreds of billions of dollars which these agencies need to remain solvent has been factored into Obama's fantasy-budget (see “Obama continues peddling fantasy deficit numbers”).


Thus, the only real difference between the U.S. housing bubble, “chapter I” and the new “chapter II” is that much of the future trillions in hand-outs, “loans” and other, assorted bail-outs which will be squandered in the next wave of insolvencies will be used to prop-up government entities.

[Disclosure: I hold no position in Fannie Mae or Freddie Mac]