The Mortgage Insider

I’m sure you’ve heard the old saying, “It’s good to be king!” Well, it must be true. I just wasn’t aware we lived in a monarchy, or should I say “financial oligarchy.” Unfortunately after I finished this story, it was the only logical conclusion I could draw. To be honest, I can’t take credit for breaking this story either. I received an e-mail from another friend of mine in the business. After I saw the attached video, I was so dumbfounded that I initially thought it had to be a hoax. So I started to search for back-up from other news sites and sources. Sure enough, it appears that this is absolutely true. See what you think …

The initial video report I received was from a mortgage industry pundit named ThinkBigWorkSmall.com[1]. Their exposure of this story had become so viral on the Internet that it provoked an actual response from the FDIC on their site[2] just last week. The scary thing is, the FDIC release is purposely worded to discredit the source, deny the story entirely, and not directly address any of the relevant facts. Of course, that merely further convinced me of the story’s accuracy. You’ll see why in a minute. But let’s start at the beginning.

IndyMac Bank was one of the largest sub-prime lenders, and the seventh largest mortgage originator in the country overall just before its collapse. When it went out of business in July 2008, it was the fourth largest bank failure in U.S. history. For those of you who didn’t know, IndyMac was founded in 1985 by another well-known crook named Angelo Mozilo, “… as a means of collateralizing Countrywide Financial loans too big to be sold to Freddie Mac and Fannie Mae.[3]” In 1997, Angelo spun IndyMac off from Countrywide for a huge profit, as you would expect. And IndyMac proceeded for the next decade to make and securitize loans with little or no verification of income or assets, to consumers with questionable credit. But the story of IndyMac’s failure wouldn’t be complete without mentioning a couple of relevant facts. First, the securitization of these loans could not have been accomplished without being aided and abetted by the AAA rating the bond rating companies sold them for a large fee. And more importantly, IndyMac likely would have been shut down much earlier had it not been for one Darrel Dochow of the OTS (Office of Thrift Supervision—who by definition should have been “supervising” IndyMac all along). You may remember that name from the S&L crisis of the 1980s. Back then, he overrode federal bank examiner’s recommendations to seize Lincoln Savings and Loan, before that bank’s spectacular collapse. Yep you guessed it, being an utter failure as a regulator in the 1980s actually earned him a series of promotions.
 

Unfortunately for us, Mr. Dochow’s ineptitude was apparently only exceeded by his utter disregard for the law. I say that because of a little “back dating” scandal involving IndyMac. It turns out he allowed them to back date an $18 million contribution two months after the fact, so they would appear to meet capital requirements in the March 2008 quarter.[4] Well, it turns out that, based upon a subsequent audit, there never was any documentation for this $18 million either. In fact, he allowed four other banks to do the same thing, all of which subsequently failed. In June of 2008 and a month before IndyMac’s collapse, Senator Charles Schumer (D-NY and member of the Senate Banking Committee) blew the whistle in a series of open letters to regulators, including the OTS. He expressed his concern for IndyMac’s dire financial condition. While that caused a huge run on the bank and hastened IndyMac’s failure, it turned out he was merely beating an already dead carcass. However, that didn’t stop the director of the OTS and Mr. Dochow’s then boss, John Reich, from responding to Senator Schumer’s concerns. Mr. Reich’s response was, of course, to discredit the source, deny the story entirely, all the while failing to address the relevant facts directly. So now maybe you understand my problem with the FDIC’s current response?

Anyway, Mr. Reich was forced to finally demote Mr. Dochow when this back dating scandal broke in the news. You read that right, he wasn’t fired for this infraction and he retired with a full pension in February of 2009. Thankfully, Mr. Reich likewise resigned in disgrace in February of 2009, amidst a Treasury Department investigation into “OTS failures and misconduct.”

Now fast forward a month to March of last year. The FDIC sold IndyMac’s $20.7 billion in loans and other assets to OneWest Bank for $16 billion.[5] That’s not a bad deal—especially when you consider the FDIC financed $9 billion of that on very favorable terms. But you’re going to love the punch line. Guess who runs OneWest Bank? That would be none other than Steven Mnuchin, former executive VP at Goldman Sachs. In fact, OneWest was only formed one month before the sale and was funded in large part by George Soros. Soros is, of course, the billionaire hedge fund manager convicted of insider trading, and one of the largest individual contributors to President Obama’s 2008 campaign. I know what you’re thinking, “Doesn’t being convicted of insider trading disqualify you from running a hedge fund? Shouldn’t he be in prison or something?” The answer is, “Not if you have friends like these!” The FDIC’s rebuttal indicates that the sale of IndyMac was “competitively bid.” But if OneWest was only formed a month before the sale, wouldn’t it have been nice if they listed at least a couple of these “other” bidders?

So what kind of sweetheart deal did OneWest get? Well OneWest (Soros and Mnuchin) paid no more than 70 cents on the dollar for the mortgage loans it “owns and services.” The fact is, it only “owns” 7 percent of all the loans it services. The other 93 percent of those loans are owned by outside investors. That turns out to be lucky for us because the deal the FDIC gave OneWest was a little something my people call a loss-share agreement. Under the terms of that agreement, the FDIC will reimburse OneWest 80 to 95 percent of the losses on those loans, but only after those losses reach $2.5 billion.

That doesn’t sound like much of a sweetheart deal? Well, the 80 to 95 percent reimbursements are based upon the “original loan balance” and not what OneWest paid for the loans. So in essence, it guarantees OneWest a 10 to 25 percent profit on any loans it forecloses. The $2.5 billion benchmark is, for all practical purposes, just an incentive to foreclose those loans as fast as possible. I mean if you were offered a profit of somewhere between $250 to $625 million from the government once you foreclosed $2.5 billion in loans, what would you do?

Interestingly enough, the FDIC thinks it is important for you to know that this deal only applies to the 7 percent of the loans owned by Soros and Mnuchin. And you should also be aware it hasn’t paid a dime out on this loss-share agreement … yet. Gee, I know I’m feeling relieved. Finally the FDIC wants to assure you that it monitors OneWest’s compliance of the Home Affordable Modification Program. Mmm … they must mean the same way they monitored IndyMac all those years leading up to the collapse. All I know is that they don’t offer evidence of a single loan modified by OneWest anywhere on their site. And after I Googled “OneWest loan modifications” … well, let’s just say evidence is hard to come by.

The Fed has started to tighten interest rates, and the hen house is obviously full of foxes. Do any kind of financing you need to get done now. Sooner or later those hens will have to come home to roost!

[2] http://www.fdic.gov/news/news/press/2010/onewest_lossshare.html

[3] http://en.wikipedia.org/wiki/OneWest_Bank

[4] http://articles.latimes.com/2009/feb/21/business/fi-dochow21

[5] http://articles.latimes.com/2009/mar/20/business/fi-indymac20

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The Fox is in the Hen House 

Once again I find myself writing you, from the front lines of the economic crisis. I keep hoping there will be something to report that will cheer you up, but instead I find something that makes me shake my head in disgust. Since the start of this, I have consistently maintained this Great Recession we are in the middle of, is really a “credibility” crisis of epic proportions. Not only do we need to get rid of the whole notion of “too big too fail”, but we still need to clear the toxic assets off of the big bank’s balance sheets. We likewise need to see the systemic fraud that brought us all here prosecuted, in order to restore this lost credibility. So my question is this. How can we do any of that, if the guy running the Treasury Department is part of the problem?

That’s right. Treasury Secretary Timothy Geithner testified yesterday, before the House Oversight & Government Reform Committee. “So this is big news why?” you ask. Well it turns out Mr. Geithner has more problems than his well publicized lack of Turbo Tax skills. “Timmy”, as he prefers to be called, was the head of the Federal Reserve Bank of NY (FRBNY) before accepting his current post at the Treasury. In that role, he worked directly under Fed Chairman Ben Bernanke, and in conjunction with then Treasury Secretary Hank Paulson. Hank Paulson was of course coincidentally, the former CEO of Goldman Sachs. So when the first bailouts were being handed out by Paulson, it turns out Goldman Sachs received 100 cents on the dollar, for its book of toxic assets. You may recall they were the only bank to get this sweetheart deal from the government. But don’t let that get your blood pressure up. You need to keep in mind the fact that according to Goldman’s current CEO, Lloyd Blankfein, Goldman Sachs does do God’s work here on earth.[1] So that’s got to make you feel a lot better knowing…right?

 But here’s where our story gets fun. You see, Goldman Sachs was also the counterparty to AIG on about $13 billion dollars worth of “credit default swaps” (CDS). That’s a fancy way of saying Goldman had insurance policies with AIG, which AIG obviously couldn’t pay out on. Now wait…I know what you’re thinking. You should never mind that issuing insurance policies without the capital to make good on them, is in fact the very definition of fraud. And never mind that Paulson as CEO of Goldman Sachs made all of these bets with AIG’s financial products unit, and then ended up in the Treasury Department guaranteeing those same bets back to Goldman. That just “sounds” like a colossal conflict of interest. You really shouldn’t be so cynical. “Well just don’t tell me they got 100 cents on the dollar again for these worthless swaps”, I hear you say. Well OK, you got me there…maybe your cynicism is warranted after all.

 So I guess by now, I don’t have to tell you which bank Paulson sent our money through, to achieve this noble affect. Yep. It was none other than the FRBNY, under then NY Fed governor Timmy Geithner. However in his testimony, Timmy swears up and down that he didn’t really know what was happening at the FRBNY. And more importantly he claims he didn’t have any hand in these AIG bailout funds, or their immediate transfer to Goldman and several other foreign banks. And finally, Timmy claims no hand in the subsequent cover up of these transfers, documented in a series of emails between AIG and the FRBNY. Those emails of course, direct AIG specifically not to release any information to the SEC, this committee, or any other Federal investigation for that matter. So that makes perfect sense right? As head of the Federal Reserve Bank, in the epicenter of the meltdown, why would he have any interest in this sort of thing? It was just the largest financial collapse in US history, next to the Great Depression after all.

 Well with leaders like this in charge of “fixing” this mess, I am sure you are as confident as I am that nothing more could possibly go wrong. But just in case you need to get a home loan, to purchase a place or consolidate your debt, you might want to get that done sooner rather than later. I’m just saying…

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The Forecast Calls for Debt

 Well, first I want to wish all of you a very Merry Christmas and a Happy New Year. It has been a pleasure and privilege to serve this community for the last 23 years, and we are all truly blessed to live in this undiscovered mountain paradise!

 That said, it is also the time of year when I like to look ahead and give you some of my economic forecasts for next year. That also means it might be worth taking a look back to see what predictions I made and how accurate I was. Since a lot of my forecasts for next year are carryovers from last year, let’s walk through the track record, shall we?

 Last year, I told you we were in a financial “credibility crisis.” I said we needed to have complete transparency of these “too big to fail” (TBF) banks’ true financial balance sheets made public—including their offshore and previously off-balance sheet items. I also said that we needed to see large numbers of criminal prosecutions for the fraud which has enveloped the financial system and caused this mess. And I predicted that the credit markets would remain predominantly frozen until these two things were done.

 So how’d I do? Well, so far we have done neither. In fact, all of the remedies applied so far have done nothing but reward the very same frauds who created this Great Recession. To be fair, I had a decent year of production, as did my industry in general. “So doesn’t that mean banks have opened up” you ask? “Well … not so much,” is the real answer.

 Last year the Federal Reserve (the guys who print our money), provided a budget of $1.3 trillion just to buy mortgages. Over the course of 2009, they provided over 90 percent of the funding for all mortgages nationwide. However, that program expires in March 2010 and is not expected to be renewed. Similar programs were instituted to fund student loans, cars loans, and such. In other words, the government might as well have been lending the money directly to the public. However, that wouldn’t have allowed them to stuff even more of our money into the TBF banks’ back pockets. And what about those credit card letters we’ve all been getting? Nationwide these banks have reduced available credit to consumers by an estimated $2 trillion this year. Does that sound like progress to you? Nope, that still sounds pretty frozen up to me.

 Next year, I see more of the same from these TBF banks. The “Toxic Asset Auction” we were promised last July never materialized. The banks refused to participate and sell or settle their derivative’s exposures—and the Treasury and FDIC failed to get these toxic assets off of the banks’ balance sheets as promised.

 Now, $3 trillion dollars later, the government is starting to run low on bullets. The annual budget deficit has more than quadrupled in the last 12 months, and the national debt will reach nearly $14.5 trillion by the end of 2010. That is approximately 100 percent of our annual GDP, which is a higher percentage than during WWII! Unfortunately, I don’t see any end to this current spending spree in 2010. There was over $11 trillion in emergency government funds set aside for this calamity in 2009. That leaves at least $8 trillion to go—and have you ever seen a politician who didn’t spend more than was budgeted? In fact, you may have noticed Congress is actually attempting to raise the nation’s “debt ceiling” another $1.5 trillion as I write. So it doesn’t take a degree in astrophysics to predict the government will continue printing and spending money at the same furious pace for most of next year.

 I, likewise, predicted the failure of HAMP (the Home Affordable Modification Program). Early this year re-defaults were running in excess of 36 percent. By the third quarter, that number was up to 62 percent. Apparently it is so bad now that the Administration has refused to release that data, as of last month. That is a real worry since they have pushed the TBF banks into enrolling over 650,000 consumers into this program. Perhaps I should upgrade that to “complete and utter” failure?

 Lastly, I posited that we were being told a fairytale—a fairytale that says all this government spending has somehow mitigated the problem, when in fact, it may only be postponing the inevitable and making matters worse. By worse, I meant that we would still have to go through the same pain, but for a longer period of time than we should have. And by using this failed methodology for a second time in history (see New Deal for details), I was worried that we would devalue our currency to the point of grave concern.

 So how did that prediction work out? Mmm … the dollar is down another 6 percent on the year (13 percent since March), and a whopping 38 percent since 2001. In fact, the dollar is now the “carry trade” currency of choice internationally—something that used to be the domain of countries like Mexico and Argentina. Now go ahead and imagine what will happen when they finally stop printing and spending our money. Does anyone really believe that consumer spending will have recovered by then?

 Okay, so what does all this add up to for Colorado? Well, the good news is that our unemployment rate is 6.9 percent and down from a peak of over 8 percent. That’s much better than the 10 percent national figure. Further, Denver’s housing market appears to have put in a bottom, as far as prices goes. The mountain communities should likewise stabilize late in 2010, though remain sluggish. The second wave of stimulus moneys will be spent on “shovel ready” projects, and that, along with all the other government spending, will artificially keep GDP in positive territory again for 2010.

 But by mid-year, I expect a few new problems to appear. Several states will need Federal bail-outs after tax receipts disappoint in April. Likewise, I expect some of the TARP banks to need additional bail-outs. We may even see some who have repaid TARP come back begging, as losses mount on commercial and consumer defaults nationwide. Using the tactics currently being employed and barring any substantial change in direction from the Administration, the dollar will continue to slide. That will force foreign investors, at some point next year, to demand higher yields on our Treasury debt. At the same time, the Federal Reserve will likely have to begin raising rates and start withdrawing its liquidity programs. And 2010 should see a spate of new taxes appear, both on the state and federal levels.

 Higher taxes and any inflation will create a drag on consumer spending, which will not have recovered unless we see a real employment turnaround. However, I don’t see how companies nationwide will begin rehiring when there is so much legislative uncertainty. If you run a company, you have health care costs up in the air, with cap and trade, inflation, and higher taxes looming. And political will in the face of overwhelming debt will eventually curtail government spending by the end of the year. Finally, financial reform looks like it is designed to merely coddle the TBF banks. So lending will remain predominantly frozen again next year. That leaves consumers spending in the tank without government spending to replace it any longer. Nationwide, folks are already working to pay off their consumer debt, as rates and fees go up ahead of the new credit card laws. At this time, I don’t see any way that a double-dip recession can be avoided in 2011.

 I really hate being the bearer of this kind of news. I do believe the economy will heal eventually. Demand worldwide will return, and we have great companies in this country. Colorado has a lower unemployment rate because we have a diverse economic base and a highly educated work force. Our state budget deficit has been greatly mitigated by the effect of TABOR (Taxpayer’s Bill of Rights). And, relatively speaking, we should see the eventual recovery here ahead of almost anywhere else in the nation. Until then, I suggest you get your financial house in order and prepare to weather the higher interest rate environment that is surely coming. A refinance to consolidate all your debt may make very good sense. Ask your CPA and then get going. If you are a buyer, you won’t get a better opportunity than right now. The current combination of rates, home prices, and tax incentives will likely not be seen again in our lifetimes.

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The market had been expecting jobless claims in November to be in excess of 130,000. Instead the jobs report released Friday showed only 11,000 newly unemployed. In addition, the national unemployment rates actually fell to 10%, from 10.2% last month. Keep in mind that this news came a day after the Jobs Growth Summit. With what will undoubtedly be more spending on job creation from that process, and the second phase of stimulus money ($200B+) starting next month, unemployment appears poised to turn substantially positive sometime in the first quarter of 2010.

While one can debate the result once all this stimulus is withdrawn, it seems to me that next year should finally show some similar and substantial turnaround in housing. The Denver market has already shown strong signs of stabilizing over the last few months. And I think next summer will show solid gains in home sales here, over 2009.

That leaves the rate environment ahead. Any recovery perceived will mean rates drift higher. Presure is already forming for the Federal Reserve to raise rates starting in the first quarter of 2010. With tax credits for buyers, interest rates and home prices where they are now, I truly think this is the best buying time for consumers we’ll see.

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Is it just me, or does the current proposed financial reform sound somehow engineered by the very banks that caused this mess? It feels a lot like the suspicions I had around the distribution of TARP funds. We give these financial geniuses billions of our tax dollars to cover their bad bets—but heaven forbid we demand an accounting for what they do with it. I guess you can just add the phrase “political transparency” to your list of oxymorons, eh? So much for hope and change …

So let’s talk about “too big to fail” for a moment and examine the stakes involved here. Of the more than 8000 banks we still have left in the country, just four control nearly 40 percent of our country’s deposits: Wells Fargo, Bank of America, Chase, and Citibank. Now add everyone’s favorite, Goldman Sachs, and let’s talk about that nasty unregulated derivatives market. These five institutions have 97 percent of the industry’s notional derivative exposure (nearly $200 trillion1 still). If ever there was a case to be made for breaking up and compartmentalizing an industry into smaller parts, this one screams for intervention on the public’s behalf. You would think that would be particularly clear, given the fact that these very derivatives exposures (read as huge potential capital shortfalls) nearly just caused worldwide financial collapse. So clear, in fact, that even John Reed, the former head of Citicorp, apparently now agrees.

For those of you who don’t know, it was John Reed and Sandy Weill, CEO of the Travelers Group, who in 1998 arranged the $76 billion merger between Citibank and Travelers. Travelers owned the investment house Salomon Smith Barney, and combining all these together made Citigroup the world’s largest financial services company. However, this deal would not have been possible without the repeal of the Depression Era Glass Steagall Act in 1999. The Glass Steagall Act of 1933 expressly outlawed combining insurance underwriting, securities underwriting, and commercial banking together. You see, the first Great Depression had something to do with the financial sector being grossly over leveraged and operating in an environment laden with conflicts of interest and fraud. Talk about your déjà vu, huh? Oh, and did I mention the Glass Steagall Act would have also prevented this unregulated derivatives market from ever forming? So there’s that.

But wait, you ask, “These dates aren’t right!? How did a deal that violated federal law get done in 1998, if the law wasn’t repealed until over a year later in 1999?” Well, children, that it what my people call a successful “lobbying effort.”

For those of you without a proper legal background, “lobbying” is the legal form of bribery we allow of our public officials, by large commercial entities. These same officials justify this form of bribery as the “lobbyist’s right to free speech.” The practical form this “free speech” takes is, of course, as enormous campaign contributions. Those contributions are deposited directly to the personal campaign fund of the given public official, to squander as lavishly as he or she sees fit.2

Anyway, Mr. Weill and Mr. Reed made a bet that they had enough “free speech” on their balance sheets to get this Glass Steagall law repealed. They quickly added Gerald Ford (former U.S. President) and Robert Rubin (former Secretary of the Treasury under President Clinton) to their Board of Directors. So with both sides of the political isle covered and even more “free speech” to pass around, it only took a year and a half to take down this 66-year-old law that had served us all so well. President Clinton himself signed the repeal into law. So now you can all fully appreciate how ironic it is that John Reed now thinks: “As another older banker and one who has experienced both the pre- and post-Glass-Steagall world, I would agree with Paul A. Volcker (and also Mervyn King, governor of the Bank of England) that some kind of separation between institutions that deal primarily in the capital markets and those involved in more traditional deposit-taking and working-capital finance makes sense. This, in conjunction with more demanding capital requirements, would go a long way toward building a more robust financial sector.”3 Gee, Mr. Reed, what a keen grasp of the obvious you have.

Okay, so with the likes of Paul Volcker, and even our own Mr. Reed, singing the praises of breaking up these “too big to fail” banks, why does the current Administration’s reform effort appear headed in the opposite direction? After making Mr. Volcker head of his Economic Recovery Board, you would think it was because President Obama thought he might have some sense about how to fix this mess we are in. Well, not so much it seems. Both the senate and house versions of financial reform legislation create new super regulators and/or new government agencies, possibly funded with mandatory contributions from the “too big to fail” banks. This fund would then be used in the event the “too big to fail banks” pull this stunt again. But by doing so, this “too big too fail” notion is memorialized and codified into law. In other words, under these proposed reform measures, we accept having institutions large enough to pose a systemic risk, but we create an insurance policy for when it happens again. So you tell me, how would you ever know the fund was adequate and who would oversee the safety of such a large fund? Mmm … I seem to recall another large fund set up for insurance purposes. I believe they called it Social Security, but no one seems to know where all that money went either. And whose idea is this again? Well, I don’t know about you, but it sure sounds like a lot of “free speech” to me.

My advice for you? Use some real free speech and contact your representatives to demand some kind of common sense reform. In the meantime, mortgage rates won’t likely be this low again next year. So, if you are going to do anything with real estate, do it sooner rather than later.

1 According to the Office of the Comptroller of Curreny’s quarterly report on Bank Trading and Derivatives Activities 4th quarter 2008.

2 Feel free to Google “Keating Five” for further case studies in these sorts of effective lobbying efforts.

3 The New York Times, in a letter to the editor, published Oct. 22, 2009.

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In the news, the trade deficit (we import more than we export) jumped 18%, led by the greatest surge in imports in 16 years. Imports were led by automobiles and energy (oil), which are normally a signs of recovering demand amongst consumers. So this ugly number may actually be a good thing. On the other hand, these orders could be seen to replenish the (minimum) inventories needed, on the heals of the “cash for clunkers” program ended in August. Oil too can be distorted by hedging volume increases (speculation), set about by fears of a further falling dollar. It seems to me a bit early to declare the corner has been turned. But let’s hope so!

My concern here is that direct government stimulus in the economy over the last year is in excess of ($2.8T) 20% of our annual GDP (at $14T/yr). So should we be surprised that our growth last quarter was finally up 3.5%. Our should we feel short changed that it only amounted to a 9.7% turn around from 1 year ago levels. Call me crazy, but if I spend $20 to get a $10 benefit, I usually get a bit crabby. So we still need to see what the economy does when stimulus is withdrawn—whenever that may be. The unspent (collective) stimulus funds left are in excess of $8T. So if the dollar is already down 12% since March, what will it look like if they spend the rest of this, one wonders? The next few quarters will obviously be a critical test of this Keynesian spending theory, as the infrastructure projects and other shovel ready programs begin in earnest.

In other news, there are still over 300,000 foreclosure notices going out each month nationwide. Estimates are that fully half of those will become additional inventories eventually.  However, banks are currently actively delaying the marketing of those homes, in order to help support prices. Experts believe Denver metro should avoid any second dip in value, since our inventory levels are declining, and we never had the kind of over speculation seen in harder hit areas of the country. Let’s hope.

Have a great weekend!

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You may remember that little $787 billion economic stimulus bill, called the American Recovery and Reinvestment Act (ARRA). I wrote about it last January when the original proposal called for as much as $825 billion. I was disturbed back then by the size and delivery time tables. My reasoning was that if we were in such a state of emergency that we needed to drop nearly a trillion dollars to save us all, then why did the Congressional Budgetary Office indicate that approximately 30 percent of ARRA funds wouldn’t even be spent until 2011 or later?

Fast forward here to early November, and sure enough, eight months later, we have spent just somewhere around 21 percent or $168 billion of the total allotted for the ARRA. So that was the plan, right? The argument the Administration has made all along is that the New Deal failed not because it didn’t create any permanent new jobs, but because it was withdrawn too early. So paying people to dig holes and then fill them the next day, would have worked in the long run had we just given it more time. Makes sense to me. I can’t understand why you’d be scratching your head. Let me see if I can help you out here with the math.

According to CNNMoney.com and a handy little chart they created (http://money.cnn.com/news/storysupplement/economy/bailouttracker/index.html), we have spent $2.8 trillion of the $11 trillion+ allocated for all these sorts of government programs combined. Likewise, our economy normally generates an annual Gross Domestic Product (GDP) of approximately $14 trillion. So, dividing these numbers out, that investment of $2.8 trillion to save the economy is right at 20 percent of our annual GDP.  And how is that investment working out, you ask? Well 4^th quarter GDP in 2008 was down something like 6.2 percent. Meanwhile, this past Thursday, the Bureau of Economic Analysis (BEA) reported 3rd Quarter GDP at up 3.5%. So in a year, we borrowed and spent 20 percent of our annual GDP, to get an 9.7% percent turnaround in that same GDP. And all this without a single new permanent job created. Now you get it, right? I mean these are brilliant results really, and who could argue the need for even more of this kind of thinking?

Well, your wish for even more “investments” just like this are about to be granted, it appears. Congress has put together roughly $200 billion in new proposals for “Economic Relief.” But we are being instructed that these new programs should NOT be considered a second stimulus, even though some of them extend programs specifically included in the first stimulus. (Don’t make me report you to the government’s Web site for misinforming the public.) According to a recent Associated Press release: Nancy Pelosi said lawmakers need to hear from economists before settling on a package… “What is it that we can afford? What works the fastest?” Pelosi said. Well, I don’t know about you, but I can hardly wait for more clunker money. I missed the first one. But I won’t miss a second chance to stick my unborn grandchildren with the bill for a new car. I’m sure they will be miserable, unappreciative, little brats anyway. Serves them right!

In addition, the CNN chart does not include the $1 trillion the Federal Reserve has spent so far, buying mortgages from the big banks. (Thank goodness those trustworthy banks haven’t been grossly gouging the public, by charging nearly double the price they usually get selling mortgages.) And the Fed has also spent at least $300 billion buying U.S. treasuries to monetize some of our debt. That’s a fancy way of saying they simply printed money to buy that $300 billion dollars worth of treasuries. So we got that going for us to!

What does all that mean for mortgage rates? Well, the Fed seems committed to keeping rates down for as long as they are allowed to print our money. But with a nationwide campaign to audit the Fed looming, I wouldn’t wait much longer.

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“In my many years, I have come to the conclusion that one useless man is a shame, two is a law firm, and three or more is a congress.” – John Adams (2nd U.S. president)

Well, I think that adequately sums up yet another month of financial news, don’t you? Let’s review a couple of the more mind-boggling and egregious acts for fun.

We’ll start this month with the Administration’s circumvention of Article 1, Section 10, Clause 1 of the U.S. Constitution which is intended to prevent government from “… impairing the Obligation of Contracts …” otherwise known as the “Contract Clause.”

Our forefathers placed this clause in the U.S. Constitution for very good reason. As professor Zywicki, a professor of law at George Mason University, recently summed up in an article for the Wall Street Journal, “While the rest of the world in 1787 was governed by the whims of kings and dukes, the U.S. Constitution was established to circumscribe arbitrary government power. It would do so by establishing clear rules, equally applied to the powerful and the weak.”

Now, fast forward to 2009 and the Chrysler bankruptcy. We watched our own president browbeat senior debt (bond) holders into accepting 30 cents on the dollar, and then turn around and give the UAW 50 cents on their junior debt positions. So … let me get this straight. The Constitution is a sacred document when discussing the torture of Khalid Sheikh Mohammed, but it’s a worthless piece of paper when referring to contract law?  And what about more of those pesky unintended consequences, you might ask? Well, let’s just see how hard (expensive) it is to get private debtor-in-possession (DIP) financing lined up when GM goes through its bankruptcy—or eventually AIG, for that matter. Then, there is that toxic asset auction coming up one of these months. I bet the hedge fund and private equity guys (some of the same guys that were short-changed above) can’t wait to jump into bed with the government, knowing that any contracts may be subject to change shortly after the ink is dry. At least they will have the satisfaction of knowing it was their patriotic duty. I am sure that will be incentive enough, right?

This last month we were also treated to the stress test results for the nation’s 19 largest financial institutions. Pursuant to the Federal Reserve’s findings, 10 of the 19 were ordered to raise a total of almost $75 billion in additional capital. We were told that this was just a precaution against further economic downturn. The other nine were reportedly all quite healthy. That number was much better than most experts feared and sparked a nice little rally in financial stocks over the last few weeks.

So, what’s the hitch? Well, the only fact that concerns me is that the test purposely used a “cash flow” methodology for determining the value of these bank’s assets, rather than the standard account practice know as “market value.” This is a much more complicated (read as statistically manipulative) way to conduct the test. My guess is that it was determined early on that using standard accounting practices would have produced failing grades across the board, and that all 19 banks may actually be insolvent. So, this leaves one big question: If it was not for that reason, then why was this suspect method used? (Gee, wouldn’t it be nice if we still had any real journalists left in this country? Maybe then one of them might ask just that question.) If my suspicion is correct, then it appears the plan is to live with a bunch of zombie banks like they have in Japan. They have been in a recession for over a decade, waiting for their banks to earn their way out of the mess they made. And their banks were rank amateurs when it came to making a mess, as it turns out …

What does all of this collectively mean for mortgages and why should you care? Well, even if the Constitution doesn’t grab you, then maybe this fact will: Nationwide funding capacity for mortgages is down 85 to 90 percent from just one year ago. Yes, you read that correctly. That should tell you what shape these 19 banks are really in. That means getting a mortgage is taking much longer than usual. I see many clients who have waited with other lenders for 60 to 90 days without any results or answers, only to pull their loan applications and have to start all over. Then there is the other fact that the government’s $1.2 trillion program to suppress mortgage rates will be past its half-way point as early as the end of July. After that, rates will likely start drifting back up at an accelerated rate through the end of the year.

The bottom line is that if you are going to get in on these current mortgage rates, you need to start NOW! Once the government turns off the tap and this program is gone, I fear the mortgage market will go back to the same log jam we had before—but at substantially higher rates than before this program started. Unless you know something I don’t, you can’t simultaneously print $12 trillion dollars and avoid a severe case of inflation. Barring further market manipulations by Washington, think of mortgage rates approaching double digits again as early as late next year. I guess we’d better hope the housing market is all better by then, huh?

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The money powers prey upon the nation in times of peace and conspire against it in times of adversity. It is more despotic than a monarchy, more insolent than autocracy, more selfish than bureaucracy. It denounces, as public enemies, all who question its methods or throw light upon its crimes. I have two great enemies, the Southern Army in front of me and the bankers in the rear. Of the two, the one at my rear is my greatest foe. – Abraham Lincoln

As I mentioned last month, we had what I considered very suspect results from the Treasury’s “Stress Test” of our nation’s 19 largest banks. I was concerned because this so called test used a statically manipulative “cash flow” methodology, to value the banks’ toxic assets. My concern was that they were about to participate in an auction, that would expose the true market value of these very assets. Well… not to worry. The auction of toxic assets has apparently been postponed indefinitely. But wait…wasn’t that the magic bullet? Wasn’t that the way we were told that the banks would finally shed these toxic assets from their balance sheets and get back to business of lending? Haven’t we been told by our government all along, that we needed to cough up TRILLIONS of dollars in debt to pay for all these bailouts, to avoid another Great Depression? Weren’t we all under the impression that the sole source of all our problems economically was rooted in these “toxic assets” and the gross over leveraging they represented?  Hmm…

The really funny part is why the toxic asset auction was canceled …and you are just going to love this. Last month the 10 largest banks hired a firm by the name of the Clearing House Association. No, not the magazine subscription firm that shows up at your door with big oversize checks. However the Clearing House Association does show up routinely in Congress with big oversize checks, in a process we call lobbying. This time they were hired specifically to sell the idea that these banks should be allowed to bid on their own toxic assets at the PPIP (Public-Private Investment Program) auction. Yes, you read that correctly, and they probably used our bailout funds to finance this lobbying effort. Now normally the collective set of lap poodles we call our US Congress would sit up and bark as directed, whenever a request is made accompanied by large oversize checks. After all, the political malfeasance that allowed us all to get in this much trouble was certainly bought and paid for long ago. [See the Community Reinvestment Act and the Gramm Leach Bliley Act as un-indicted co-conspirators in this economic debacle.] But this time they managed to find enough political will to just say “NO”! And what was the collect response from our troubled banks? They told the Treasury that they refused to play then, and took their ball and went home. This of course has left the FDIC, the Treasury and Mr. Geithner looking like fools. So in typical political fashion, the FDIC and the Treasury issued statements that these banks really didn’t need to participate in the auction since they had collective been able to raise a paltry $100B in private funds since the stress test. I guess they figure that we as a population are so mathematically challenged, that we wouldn’t notice that $100B doesn’t begin to cover the even $1T of the several trillion dollars pledged to shore up the banking system. But if according to some new lap poodle math it does, then shouldn’t we be asking these representatives to explain, why then do they still need all these trillions of dollars?

In conclusion, mortgage rates are still low. But they are only low because of the $1.2T Federal Reserve mortgage program currently in place. Sooner or later, there will be a day of reckoning and these rates will be gone for many years to come. Don’t miss out. Call me, or call any other mortgage banker. Just don’t miss out on this opportunity to recoup some of these bailouts we will all be paying for the rest of our lives.

Dan Smith can be reached at 303-674-0201, or visit him on the web at www.ColoradoHomeLoans.com!

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