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Dr. Housing Bubble Blog on American Mortgage Casino Gambling

01 May

The great American mortgage casino – How the Goldman case is about the broken down system that allowed massive gambling in America’s housing market for the last decade. Average sales price down because distress sales still account for 30 percent of home sales nationwide.

from Dr. Housing Bubble Blog by drhousingbubble

The case against Goldman Sachs is the ultimate conclusion to a decade long housing and gambling bubble fueled by easy money, no-documentation loans, and fraud spurred lending.  While the investment banks nitpick whether a fraud was actually committed, many Americans are getting their first primetime dosage of how corrupt and absurd the crony banker system has become.  To sum up the situation, Goldman helped hedge fund billionaire John Paulson find the ultimate toxic housing bet.  Through various parties, it is alleged that Paulson pushed for certain undesirable toxic mortgages to be part of a giant pool of mortgages that unbeknownst to Goldman clients (the issue at hand), Paulson was making the ultimate short bet.  Goldman collected fees upfront, Paulson made out like a bandit, and someone got the short end of the stick.

Wall Street is so out of touch with how bad things are in the real economy that they are fighting on the semantics if fraud actually occurred.  But to many Americans watching this circus, they are wondering how in the world someone could make billions of dollars by betting against the implosion of the American housing market (a market where 69 percent at one point owned a home).  That is the disturbing element now being leaked into the market and psyche of Americans.  Goldman was one of those lucky banks that received a nice chunk of the trillions in bailout money pumped out by the Federal Reserve and U.S. Treasury. So what people are coming to grips with is the idea that the government essentially bailed out the decade long gambling spree of the biggest cronies we have seen in modern finance.  Who benefitted from this kind of deal?  The bets in fact, actually made things worse.  In order to satisfy this gambling spree and make it even bigger, the message was sent out (with the implicit desire from Paulson and Goldman for junk mortgages) to brokers on the streets who kept pushing out option ARMs, Alt-As, and every other piece of crap we have come to witness so they can add it to one giant bet.  It would be one thing if it was only Goldman but virtually every investment bank got in the game.

So where are we today?  The market is still in complete disarray:

Source:  First American Core Logic

The latest data shows that in January of 2010 the U.S. market with all of its home sales, had 29 percent of all these sales come from the distress pool.  And as you can see from the chart above, a large number of distress sales will cut into the average sales price.  That recent bump has come from artificial stimulus through the tax credit, HAMP stalling, and the Federal Reserve buying $1.25 trillion in mortgage backed securities keeping mortgage rates artificially low.  But these things can’t last (the tax credit as of today has expired for new home purchases).

What is hard to understand from a psychological standpoint is how people can think things are good when we have over 7 million mortgages that are either 30+ days late or in some stage of foreclosure?  We are, as of today even with all these new measures, near the peak of the foreclosure problem.  Last month was the highest foreclosure filing month ever recorded!  This is not good.  How someone can interpret this as good news really baffles the senses.  Until that distress percentage creeps down into the single digits, the market is highly volatile.

If you think mortgage fraud has gone away because option ARMs and sub-prime mortgages have gone the way of the dinosaurs, think again:

Source:  CNN

“The report described several types of fraud that were detected most often. These include so-called “liar” loans, in which mortgage professionals knowingly listed false income claims for borrowers; inflated appraisals, in which mortgage loan officers or brokers pressure appraisers to overvalue a home so it would qualify for a bigger mortgage; and false occupancy claims, which is when buyers claim they will live in a home but are actually buying it for investment purposes.”

It isn’t like we have flushed out the industry with new rules and sensible financial regulation so why would we expect anything different?  And what a stunner that California ranks as number three in the nation for mortgage fraud.

Some of the hardest hit areas are in the “fab four” states of California, Florida, Arizona, and Nevada:

Source:  First American Core Logic

Riverside, the largest city in the Inland Empire had a distress sales rate of over 60 percent (the only large area to have this figure even beating out Detroit Michigan).  Aside from looking at this data as just a statistic, think of each family and household that is struggling to make their mortgage payments.  People don’t want to lose their homes (typically).  Sure we have a unique market in California where thousands of homeowners are strategically walking away from their homes even though they have enough income to pay their bills.  But the bulk of these distress cases are Americans that have lost jobs, have seen their mortgages recast/reset, or have seen their hours cut back.  1 out of 4 Americans with a mortgage is underwater on their mortgage.  And that is why the amount of equity Americans have in their home is near an all time low:

Source:  Calculated Risk

People forget that the housing bubble occurred at an arms distance.  How so?  Well follow the chain:

Borrower > (take on toxic loan with the hope that they would flip/sell before the mortgage payment went higher ideally with a much higher price).

Mortgage Broker > (didn’t care if you were unable to pay mortgage 1 year later, they get their commission upfront and higher for the more toxic loans).

Wall Street > (once they sliced it and diced it into crappy mortgage backed securities or other junk like CDOs, it was off their hands but not without a big fee – then they bet on it).

So who really was responsible for things once they went bust?  You and everyone else in this country.  Millions of borrowers have now lost their homes.  Mortgage brokers and lenders are now fighting for small spots to push out government backed loans.  Wall Street was the last untouched party but only thanks to trillions in bailout dollars.  Yet it looks like this last bastion of protection is being eroded away with the push against Goldman, the number one investment bank on Wall Street.

I stumbled upon an article from Dr. John Grohol over at PsychCentral showing the most heavily prescribed psychiatric medications in the U.S.:

From 2005 to 2009, the biggest jump occurred with Xanax, a medication that is largely aimed at helping calm anxiety and anxiety associated conditions.  44 million of these prescriptions were given out in 2009.  Without a doubt this economic recession is exacerbating underlying issues with many Americans (Xanax prescriptions jumped 29% from 2005 to 2009 even though our population only increased by 4%).

I look at indicators like this, or jobs, wages, cost of health care, food, and so far I haven’t seen what I would expect after pumping trillions of dollars into the economy.  The typical American family has seen very little relief or help.  Sure, Wall Street is up by over 70+ percent but that is because most of the money went to the crony bankers.  And now the investment banks and Treasury are trying to say how great we are doing with TARP and it is going to cost much less than expected.  Yet they don’t talk about the great mortgage casino:

$1.25 trillion in mortgage backed securities purchased by the Federal Reserve

$1 trillion in other loans and questionable debt the Fed took on through the alphabet soup of programs

$125+ billion to Fannie Mae and Freddie Mac that continue to support loans even though mortgage fraud is still rampant

4 out of 10 loans is now insured by the FHA which is seeing record defaults and is likely to see a bailout soon

Converting i-banks like Goldman and Morgan Stanley into bank holding companies to have access to the Fed so they can gamble even more

AIG?  $47.5 Billion and a big chunk of this went straight through to Goldman for additional bad bets (do you notice how often we use bets as if we are talking about a bad gambler in Vegas?)

Wells Fargo                         $25 billion

Bank of America               $45 billion

JP Morgan Chase             $25 billion

GMAC $16.3 billion

GM  $50 billion

And a long list of other items.  So people aren’t buying that absurd spin that the cost will be so small:

“(Moneynews) One Treasury estimate put a cost of $87 billion on the financial bailout, well below the $250 billion the Congressional Budget Office estimated last year or other analyses that put the all-in number at $1 trillion or more.

“If you are going to do a ledger, you have to do a full and complete ledger,” Whalen told The New York Times.

“To talk about making money on short-term transactions with the TARP while you have this huge cost to the nation is incongruous.”

Analysts say a major factor missing from Treasury’s math is the huge transfer of wealth from investors to banks that resulted from the Federal Reserve’s near-zero interest-rate policy.

Banks benefit because they earn fat profits on the spread between what they pay for their deposits and what they reap on their loans, especially credit cards, which have a current average rate of 14 percent.

Savers and investors lose, especially those on fixed incomes.”

Just like people look back on Tulip Mania or the technology bubble, people will be asking how in the world did we allow so much gambling to take place with mortgages?  But more importantly, they’ll be asking why we didn’t reform and fix such an obvious mistake even after so much economic pain was unleashed.

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