Wednesday, August 1, 2012

Banksters Win Again


Yesterday (July 31) 2012 The Wall Street Journal reported that "Forgiveness of Debt Could Yield Savings"

The article notes that Fannie and Freddie could "save about $3.6 billion more that current loss-mitigation approaches by reducing balances for some borrowers who owe much more than their homes are worth" p. A2.

Also yesterday, The Washington Post reported: "Fannie Mae, Freddie Mac won’t be allowed to reduce loan balances for troubled borrowers" by B. Dennis and Z. A. Goldfab

[Excerpted] "The federal regulator for government-backed mortgage giants Fannie Mae and Freddie Mac said Tuesday that he will not allow the firms to reduce loan balances of struggling homeowners, frustrating the Obama administration as it looks for ways to boost a floundering economy.

Edward J. DeMarco, acting director of the Federal Housing Finance Agency (FHFA), said the agency’s analysis showed no sure-fire financial benefit to letting some mortgage holders reduce their loan amounts. He also warned that such a move could cause some borrowers to default intentionally in hopes of getting taxpayer aid....

...DeMarco reiterated his concern about the potential long-term consequences of principal forgiveness, saying that rewriting valid contracts could spook investors, encourage bad behavior on the part of homeowners and increase mortgage costs in the future....

Majia here: The Obama admin. and many "lawmakers" (if you can call them that) want this program. Why doesn't DeMarco?

Look carefully and we see who DeMarco is working for. He is for the biggest banks and hedge funds.

Derivatives such as collateralized debt obligations might potentially be "at risk" by writing down principle, BUT credit default swaps most definitely would be at risk because they get paid out when the underlying debts default.

Holders of credit default swaps want the underlying debts to default. See my post here for some background http://majiasblog.blogspot.com/2012/07/determination-of-credit-default-payouts.html

And default they will.

The Wall Street Journal also reported yesterday (same page) on "States' Hidden Jobless Woes" by Neil Shah.
This article looks under-employment in real estate bubble states such as California and Nevada.

Underemployment involves people taking part time jobs when they want full time jobs among other factors.

California's unemployment rate is reported in the article as 11.2% while its underemployment rate is reported at 20.3%.

Nevada's underemployment rate is reported at 22.3%.

I've written previously about the lack of living-wage jobs available for young people today and the over 40% poverty rate that afflicts the 25-34 year-old age group.

High unemployment and underemployment are going to drag down aggregate demand and pull down the small housing recovery.

People are not going to be able to pay mortgages from the bubble years and younger people will not be able to purchase new homes, keeping inventory high.

Ongoing mortgage defaults will be high.

However, all those banksters holding credit default swaps (a kind of insurance contract) on mortgage-backed securities can collect when the underlying debt defaults.

One might ask how the insurance companies are able to pay out on these credit default swaps given AIG and others' troubles.

Well, the government has been backstopping AIG fully.

So, the banksters and wealthy hedge funds holding the credit default swaps WIN when defaults happen so they want the defaults.

Average people do not hold credit default swaps. Read Michael Lewis' The Big Short to learn more.

However, average people do hold upside down mortgages and do have their retirement savings in pension funds and 401ks that are invested in mortgage backed securities.

Average people lose when the home owner defaults on their mortgages.

Furthermore, wealth is transferred upwards when average people lose all the savings in their houses.

Essentially, the failure to write down mortgages is another win for the most elite banksters and a gigantic loss for the rest of us...


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