The new crisis
The next wave of foreclosures will be the FHA loan crisis. You heard it here first (or second if you have been reading the WSJ or BW). You see, the FHA (a division of HUD for lack of a better way to describe it), insures mortgages for buyers of modest means. And, as with some other Federally-backed programs that you may recall, con-artists with names like "Paramount", "Countrywide", "LendAmerica" have started to populate the scene.
In contrast with the subprime product, FHA loans are not super low intro rate loans ... they have normal conditions and tenure ... but the tricksters are able to get borrowers into loans they cannot afford just the same. Often (as in the case of Paramount) they are corporate successors of the companies that produced the subprime mess: same owners, staff and even office buildings. Paramount's predecessor corp is "Premier." Premier has a default rate of over 9% on its FHA mortgages and was a huge player in the subprime mess before filing Chapter 11. So, maybe a different floor ... maybe not. Last year the FHA backed only 4% of "moderate income" loans .. this year it is already 26%. The boilerroom loan industry has just shifted focus, and the abuses are still there. The default rate on LendAmerica's loans are 5.7% ... more than 50% above the national average, and remember, these are only just coming into vogue with the scam artists. Wait a year until the recession really starts to pinch.
The FHA continues to grant licenses to people who should be behind bars -- or even have been behind bars for financial fraud, such as Premier's CEO who now works with his daughter at Paramount. The number of licenses has doubled over the past year (7 to 16 thousand) ... while at FHA, the staffing level has remained the same, about 1000 people. Can you think of something ripe for abuse?
Then there is the matter of the Wall Street Fat Cats feeding at the trough again. Goldman Sachs, which managed to off-load its CDO portfolio before the whole market came crashing down, are active in the FHA gimmick: GS bought a former subprime lender, Senderra, and converted into an FHA and re-fi lender. The business plan works like this: buy distressed debt ... mortgages or auto loans at a deep discount ... 60 cents on the dollar, refinance the loans through the FHA and sell these government-secured loans at 90 cents. A tidy 30% profit for Goldman, and guaranteed by the taxpayer.
And we should offer any bail-out security to these people? Any at all?
Instead we should be tracking each and every one of the GS-originated FHA loans, and if they go bad at any rate higher than the national average prior to the subprime mess then Goldman should be made to foot the difference. That is, let them be rewarded for their ingenuity if it does not place a burden on the taxpayer. If this works out to be a transfer scam wherein the taxpayer effectively pays Goldman for its ingenuity, then Goldman should be held responsible: the victim is not some sophisticated investor who should know better, but Joe Blow taxpayer. Heck, make Goldman pay double for disingenuously placing that risk with you and me.
The net of this is this: when the same pigs are at the trough, we should expect the worst.
In contrast with the subprime product, FHA loans are not super low intro rate loans ... they have normal conditions and tenure ... but the tricksters are able to get borrowers into loans they cannot afford just the same. Often (as in the case of Paramount) they are corporate successors of the companies that produced the subprime mess: same owners, staff and even office buildings. Paramount's predecessor corp is "Premier." Premier has a default rate of over 9% on its FHA mortgages and was a huge player in the subprime mess before filing Chapter 11. So, maybe a different floor ... maybe not. Last year the FHA backed only 4% of "moderate income" loans .. this year it is already 26%. The boilerroom loan industry has just shifted focus, and the abuses are still there. The default rate on LendAmerica's loans are 5.7% ... more than 50% above the national average, and remember, these are only just coming into vogue with the scam artists. Wait a year until the recession really starts to pinch.
The FHA continues to grant licenses to people who should be behind bars -- or even have been behind bars for financial fraud, such as Premier's CEO who now works with his daughter at Paramount. The number of licenses has doubled over the past year (7 to 16 thousand) ... while at FHA, the staffing level has remained the same, about 1000 people. Can you think of something ripe for abuse?
Then there is the matter of the Wall Street Fat Cats feeding at the trough again. Goldman Sachs, which managed to off-load its CDO portfolio before the whole market came crashing down, are active in the FHA gimmick: GS bought a former subprime lender, Senderra, and converted into an FHA and re-fi lender. The business plan works like this: buy distressed debt ... mortgages or auto loans at a deep discount ... 60 cents on the dollar, refinance the loans through the FHA and sell these government-secured loans at 90 cents. A tidy 30% profit for Goldman, and guaranteed by the taxpayer.
And we should offer any bail-out security to these people? Any at all?
Instead we should be tracking each and every one of the GS-originated FHA loans, and if they go bad at any rate higher than the national average prior to the subprime mess then Goldman should be made to foot the difference. That is, let them be rewarded for their ingenuity if it does not place a burden on the taxpayer. If this works out to be a transfer scam wherein the taxpayer effectively pays Goldman for its ingenuity, then Goldman should be held responsible: the victim is not some sophisticated investor who should know better, but Joe Blow taxpayer. Heck, make Goldman pay double for disingenuously placing that risk with you and me.
The net of this is this: when the same pigs are at the trough, we should expect the worst.
posted by Zaphod at Monday, November 24, 2008
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