Wednesday, February 18, 2009

The Housing Plan

We finally have the plans from our government to stop foreclosures and keep home prices as close to the bubble, unaffordable levels as possible.

I've been talking about my thoughts on what the plan would look like for the last few months, and unfortunately it appears they have created the exact plan that I have been describing.

The first part is to stop homes from going into foreclosure. They have announced up to $275 billion to support homeowners both in foreclosure and moving toward it. (The dollar amount is a moving target as is every new initiative)

The plan is designed to save 9 million families across the country from having to do the horrible, the absolute unimaginable..........move out of a home they cannot afford and rent instead. I can't fathom what would happen if a family was forced out of a home where they pay $5,000 per month for a mortgage and would have to move across the street into a home that is probably nicer than the one they are currently living in, and then pay $1,500 per month in rent instead.

So part one is to get mortgage payments at 31% of the borrower's total monthly income. The government will work with lenders to get the loan value down to this amount, both through principle reductions and lowering of interest rates through government subsidies.

Now, any family with any sense what so ever, will immediately lower their income as much as possible to qualify for a lower payment. If there are two people in the household working, then maybe the wife can now stay at home until the payment is lowered and then go back to work after. This should be a tremendous help to our unemployment rate which is skyrocketing toward 10% as we speak.

For families that continue to make the subsidized payments on the homes they cannot afford, the government will send them a check for $1,000 to $2,000 per year as a thank you for continuing to do the right thing.

The second part of the plan, the one that I have been warning is fast approaching, is the government's new use for Fannie and Freddie, the newly nationalized vehicles of mass destruction. The government is now doubling the stock given to the companies ($200 billion each) and allowing them to keep up to $900 billion in their portfolios.

These are just temporary numbers as well. Because no rational investor in this world would lend an American money to purchase a home at bubble prices, Fannie and Freddie will be the only lender. Their current portfolio hovering around $5-$6 trillion in loan guarantees will most likely swell to $9-$10 trillion in the coming years. Because they are lending money to homeowners at inflated prices that cannot afford to pay the mortgage, most of these loans will go bad over the next few years. The cost borne by the taxpayers will be around $1-$2 trillion based on rosy default projection.

And by the taxpayer, I mean the government. And by the government, I mean foreign countries which is where we get the money. I wonder how the Chinese are feeling about financing this catastrophe?

Someone asked Luo Ping that question yesterday. He is the director general at the Chinese Banking Regulatory Commission, and he let us know his feelings on the current administration:

“‘We hate you guys[U.S.]. Once you start issuing $1 trillion-$2 trillion[of debt] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.’”

Ah, the Valentine's Day love is in the air. Just wait till we tell them that $1 - $2 trillion is a very low estimate for the oncoming carnage coming from our insane asylum.

Tuesday, February 17, 2009

America's Greatest Con: Part II

Things are starting to get interesting now.

From 2002 - 2008, the heads of our major banks bought as many American mortgages as they could get their hands on. They then packaged those loans into beautiful little bundles called CDO's. They put a AAA rating on these CDO's and then visited investors around the world to try and sell them a piece of the American dream.

The investors around the world bought them with reckless abandon. Countries, cities, and major banks loaded their books with as many American mortgages as possible.

Today those mortgages are exploding around the world like dynamite. It is like watching a fireworks display unlike anything the world has ever seen.

The mortgage losses are wreaking havoc among these economies and even forcing some countries toward total bankruptcy.

The Americans were able to con the rest of the world into buying absolute worthless debt. What's even more funny is many of those same investors are now lining back up at the gate to buy treasury bonds issued by our government and denominated by our currency, the now beloved dollar.

What is the rating given to these treasury bonds and this currency? AAA

As Mark Twain once said, "History does not repeat itself, but it does rhyme."

Of course the story will end the same as before. People buying treasuries and dollars today are purchasing ticking time bombs waiting to explode on their portfolio. The bursting of our bond bubble will be the biggest fireworks display the world has ever seen, it will be the ultimate grand finale, making the housing bubble look like a small warm up.

I guess these investors will learn their lesson in due time. Once the treasuries begin to explode, I'm not sure what America will be able to trick the rest of the world into buying. I think our government bonds will be the last con. The greatest of them all. The United States of Madoff.

At that point all we'll have left to sell is everything they sent us over the past 25 years that was purchases with I.O.U.'s. They'll come and take our televisions, our cars, our furniture, our businesses, and the most worthless asset of all: our homes. The once prized asset that the rest of the world paid for by buying the AAA mortgage securities.

The longer the rest of the world keeps our bubble economy on life support, the worse it will be for them when they finally pull the plug and let us sink into oblivion. I always get asked the question, "Why would the rest of the world buy our debt? Obviously they are smarter than you give them credit for."

Of course it is this same rest of the world that spent the past five years buying subprime mortgage loans. Anyone who questioned that process back in 2005 was considered insane.

The world is currently realigning itself for the future. It is going to be a very bumpy transition, and when its over things are going to be very different than they were before. If you can try and imagine the world after this realignment process it will help you make decisions for your future today.