Forclosures to Rentals: Let's bail out the Banksters

January 13, 2012 "Counterpunch" -- -- Federal
Reserve chairman Ben Bernanke wants US taxpayers to purchase more of the garbage
loans and mortgage-backed securities (MBS) that the big banks still have on
their books. (Cash for trash) That’s the impetus behind the Fed’s 26-page white
paper that was delivered to Congress last Wednesday. The document outlines the
Fed’s plan for ‘stabilizing the housing market’, which is a phrase that Bernanke
employs when he wants to provide more buy-backs, giveaways, subsidies and other
corporate welfare to big finance.

“Restoring the health of the housing market is a
necessary part of a broader strategy for economic recovery,” Bernanke opined in
a letter to the Senate Banking and House Financial Services
committees.

Indeed. The housing depression continues into
its 5th year with no end in sight, mainly because the people who created the
crisis are still in positions of power. And, they’re still offering the same
remedies, too, like handing the banks another blank check to save them
from losses on their bad bets. That’s what this new “housing stabilization”
boondoggle is really all about, bailing out the bankers. Here’s a summary from
Bloomberg:

“Bernanke’s Fed study said “more might be done,”
including eliminating entirely the reduced fees for risky loans, “more
comprehensively” cutting lenders’ put-back risks; and further streamlining
refinancing for other Fannie Mae and Freddie Mac borrowers. The U.S. also should
consider having Fannie Mae and Freddie Mac refinance loans not already backed by
the government, which would add credit risk for the companies, according to the
report….” (Bloomberg)

First of all, Fannie and Freddie only return
loans (“put-backs”) that don’t meet their standards and which the banks foisted
on them so they wouldn’t have to face the losses. The idea that the
publicly-funded GSE’s should just “eat the losses” is ridiculous.

And, why–in heaven’s name–would congress want to
take on more risk when they can keep millions of people in their homes by simply
reducing the principle on their mortgages to the present value of the house?
(aka–”Cramdowns”) Naturally, the losses would have to be absorbed by the banks
who–by everyone’s admission–were responsible for the present crisis due to
their lax lending standards and, oftentimes, fraudulent behavior. This would
lead to a restructuring of the country’s biggest banks through a Resolution
Trust Corporation (RTC) so their toxic assets and backlog of foreclosed
properties can be auctioned off as soon as possible.

This is a straightforward way to fix the housing
market and it should have been done long ago. Bernanke’s solution is not only
unreasonable, it’s also deceitful. Here’s more from the Fed’s paper: “Continued
weakness in the housing market poses a significant barrier to a more vigorous
economic recovery”..(without action)…“the adjustment process will take longer
and incur more deadweight losses, pushing house prices lower and thereby
prolonging the downward pressure on the wealth of current homeowners and the
resultant drag on the economy at large.”

Did it really take Bernanke 5 years to figure
out that housing is a “drag on the economy”?

No, of course not. So, what’s going on now that
has suddenly spurred him to act?

Well, for one thing, the banks are losing a
great deal of money on the mortgage-backed securities (MBS) that they bought in
the last few years. Here’s the story in the Wall Street Journal:

“After flickering to life early in 2011, the
market for subprime- and other risky residential-mortgage bonds has returned to
its comatose state. And many investors believe a revival could be years
away.

Prices on some bonds, which are backed by
mortgages that don’t meet the standards needed to get backing from
government-controlled companies like Fannie Mae and Freddie Mac, plummeted as
much as 30% last year. The ABX, an index that tracks the value of subprime
bonds, ended the year at 43.44 cents on the dollar, down from 59.90 cents at
year-end 2010 and a peak of 62.68 cents in February 2011

While that decline pushed yields up to as much
as 17%—bond yields rise as prices fall—many fund managers have pulled out of the
market due to worries about further price declines. Moreover, repeated
downgrades have left too few investment-grade securities for them to own. Wall
Street banks, which traditionally have played a key role in the market matching
buyers and sellers, are backing away ahead of new regulations that will make it
more expensive to hold riskier assets.” (Investors Sour on Subprime Bonds,
WSJ)

So, Wall Street’s financial geniuses got
back into the MBS-biz (for a second time) and got whacked again? That’s right;
and now they want John Q. Public to pay for it with another bailout.

And, there’s more to this story, too. European
banks own roughly $100 billion of these mortgage-backed turkeys which
they’re presently shedding like crazy in order to meet new capital requirements.
That means US bank balance sheets are dripping red as the value of their
financial asset-stockpile continues to plunge. That’s why Sugar Daddy Bernanke
has stepped in, because it’s time for another multi-billion dollar bank
rescue.

Look, the Fed has already purchased over $1.25
trillion of these toxic MBS which represents humongous long-term losses for the
taxpayer. Do we really need more of this sludge?

Bernanke promised that the first round of
quantitative easing (QE1) would boost employment (It hasn’t) and improve housing
sales (it never happened) The only uptick in sales occurred because the
colluding banks deliberately reduced the supply of foreclosed homes they put on
the market. The reduction has led to a massive 1.7 million backlog of housing
units (shadow inventory) that will eventually be dumped onto the market
triggering another sharp decline in housing prices. Bernanke wants to do
something about the bulging inventory as well as prop up the value of sagging
MBS. So, the Fed’s plan actually has two main objectives; in other words, it’s
the double whammy. Here’s more from Bloomberg:

“Since the Fed started buying $1.25 trillion of
mortgage bonds in January 2009, the value of U.S. housing has fallen 4.1
percent, and is down 32 percent from its 2006 peak, according to an
S&P/Case-Shiller index. The central bank is poised to buy about $200
billion this year, or more than 20 percent of new loans, as it reinvests debt
that’s being paid off. Some Fed officials have said they may support additional
purchases that Barclays Capital estimates could total as much as $750
billion.”

Did you catch that? Taxpayers are going to get
slammed for another $750 billion. That’s nearly as much as Obama’s American
Recovery and Reinvestment Act (ARRA), the fiscal stimulus that added 2 percent
to GDP and kept unemployment from rocketing to 13 percent. Bernanke wants
to throw that same amount down a Wall Street sinkhole.

So maybe you think this won’t happen, after all,
could Congress really be so gullible as to fall for Bernanke’s fearmongering
flim-flam again?

Maybe and maybe not. But there are some pretty
wealthy and well-connected people who are betting that the Fed will do as it’s
told and pave the way for another hefty bailout. In fact, the world’s largest
bond fund (Pimco) has stumped up a mountain of cash betting that good buddy
Bernanke will get the printing presses whirring sometime in mid-January. Here’s
the story from Zero Hedge:

”….in December the fund (Total Return Fund or
TRF) doubled down on its QE3 all in bet, by “borrowing” even more cash, or a
record $78 billion, using the proceeds to buy even more MBS, as well as
Treasurys, which hit a combined 31% of the TRF’s holdings. In other words,
between MBS and USTs, Pimco holds a whopping 79% of total, mostly in very long
duration exposure. In fact, this combination of long duration and pre-QE
exposure has not been seen at PIMCO since late 2008, early 2009, meaning that as
many banks have been suggesting, (Bill) Gross is convinced that the Fed will
announce if not outright QE3 this January, then at least intimate it is
coming.”(“Pimco Doubles Down On All In Bet Fed Will Monetize MBS”, Zero
Hedge)

So what does Pimco know that we don’t know? More
importantly, from whom are they getting their information?

And, there’s another thing, too. This whole deal
about converting foreclosed homes into rental properties is another scam. Here’s
the scoop from another article in the Wall Street Journal:

“The paper also signaled that the Fed…. will try
to involve banks more directly in housing-revival approaches… One area involves
efforts to turn foreclosed homes into rental properties….

Banking regulations typically direct banks to
sell foreclosed homes quickly, although the rules do recognize this isn’t always
practical and so these properties can be held up to five years. The Fed said it
is now “contemplating issuing guidance” to banks and regulators that would
possibly allow banks to turn some of these foreclosed homes into rental
properties…..The hope is this may help stanch the flow of foreclosed properties
into markets…” (“Fed Up With the Depressed State of Housing”, Wall Street
Journal)

Bingo. The banks are not only sitting on 1.7
million shadow inventory of homes they’ve stockpiled to keep prices artificially
high. They also have millions more in the pipeline when a settlement is finally
reached on the robo-signing scandal. So, what are they going to do with all that
backlog?

That’s easy. They’ll schluff it off on the
taxpayer by creating a foreclosure-to-rental swindle where the government
provides lavish incentives for banks and private equity scavengers to buy the
homes (in bulk) for pennies on the dollar with loans provided by–you guessed
it–Uncle Sam. Here’s a summary of what’s going on behind the
scenes:

“As the Obama administration and federal
regulators work on a program to sell government-owned foreclosures in bulk to
investors, those investors aren’t wasting any time stockpiling cash and buying
foreclosed properties at auction and from the major banks.

Oakland, California-based Waypoint Real Estate
Group, a major acquirer of so-called “REO to Rental” (Real Estate Owned) just
announced a partnership with a private equity firm, Menlo Park, California-based
GI Partners, to buy foreclosed properties….

“Our approach to buying distressed single-family
houses, renovating them, and leasing to residents who are committed to a path to
future home ownership is a viable solution to our nation’s housing crisis,” said
Colin Wiel, managing director and co-founder of Waypoint in a press release.
“Our partnership with GI Partners ensures we can take the next step in our
company’s evolution.”

GI is taking an increasingly popular bet on
distressed real estate, closing on a $400 million fund with Waypoint, which has
plans to purchase $1 billion in distressed real estate assets over the next two
years, according to its release. (“Private Equity Readying a Run on
Foreclosures”, Diana Olick, CNBC)

So, what do these guys know that we don’t know?
And why are they plunking down big money when the details have not even
been released yet?

None of this really passes the smell test, does
it? The only thing we know for sure is that the “fix is in” and that Bernanke
will do what he always does when the banks are in a pinch. Throw them a
lifeline.

MIKE
WHITNEY lives in Washington state. He is a contributor to Hopeless:
Barack Obama and the Politics of Illusion, forthcoming from AK Press. He can
be reached at fergiewhitney@msn.com