The US Gov't Zero Down-Payment MortgagesWritten by Jeff Nielson Tuesday, 08 December 2009 10:06
As readers here have heard regularly, it is absolutely certain that there will be another down-leg for the U.S. housing market, beginning no later than spring of next year. We already know the latest date, since that is when the next spike in U.S. mortgage resets kicks-in.
There are two differences between the first spike in mortgage resets and the second. Not only will the second spike last for at least two years (longer than the first), but it will be much nastier than the first. A chart from Credit Suisse spells this out perfectly.
Roughly 75% of these mortgages are either “option-ARM” loans, “Alt-A” loans, or “agency” loans (i.e. from Fannie/Freddie/FHA), with still a few, remaining sub-prime loans sprinkled into the mix. Put another way, only about ¼ of the these mortgages are “prime” - a word which certainly doesn't mean what it used to, given that these “prime” mortgages are also experiencing their highest level of defaults in history.
The largest category are the option-ARM's, the category of loans which has already had the highest level of defaults. With the vast majority of these mortgage-holders having made minimum payments (or less) on these mortgages, their monthly mortgage payments will increase to multiples of their current payments – even with interest rates at record-lows.
The next-largest category in this group, the so-called “Alt-A” loans were supposed to be of a better quality than sub-prime. However, with default rates on Alt-A mortgages approaching the levels for sub-prime (given that many Alt-A mortgages were also “liar's loans”), it is clear that this supposed higher quality was yet one more fiction in this massive bubble.
Then we have the “agency” mortgages, from the money-hemorrhaging entities Fannie Mae, Freddie Mac, and now the FHA. If the massive losses which these quasi-government entities have already suffered on previous loans isn't enough to frighten people about the future defaults coming from this source, then their current lending practices should certainly do the trick.
Providing over 90% of all mortgage-funding for new home loans, the U.S. government has essentially nationalized the U.S. mortgage-market (“insured” by taxpayers), but with the free-loading banker-oligarchs able to insert themselves as “middlemen” - taking a cut of profits for themselves, while having zero, personal risk (the new “business model” for the U.S. banking oligarchy).
If this level of risk for the U.S. government is not proof enough of insanity, in itself, then its “lending standards” (or lack thereof) clearly pushes it past that threshhold. The same U.S. government which is taking miniscule down-payments on these mortgages (90% of which are only 4% or less) with one hand, is handing out an $8,000 cheque (again paid for by taxpayers) with the other hand.
The net effect is that for virtually every new mortgage which these government entities are initiating of $250,000 or less there is zero (net) down-payment. Given that a large majority of current sales in the U.S. are below this level, this means that most of the home-buyers in the U.S. this year are putting up zero down-payments.
To perfect their new Ponzi-scheme for the U.S. housing market, the Federal Reserve allows the banksters to “borrow” money at 0%. The banksters then “deposit” this money with the Federal Reserve as a “savings account” for which they collect interest, while payingno interest on the “loan”. In other words the Federal Reserve is simply giving the banksters free money (they are currently collecting interest on over $1 trillion of these “loans”).
But the money doesn't actually sit there. Instead the Fed uses that money to buy U.S. mortgage bonds – the only thing keeping U.S. mortgage rates several percent lower than they would be otherwise. So, to begin with, the new Ponzi-scheme implodes as soon as the U.S. government stops “buying” its own mortgage bonds (with 100% of the money used to “buy” those bonds simply being printed on Bernanke's magic printing-press).
Obviously even the U.S. government can only soak-up so many trillions of dollars in this manner, without taking the U.S. dollar down to zero. So we already know this next Ponzi-scheme will end badly. The U.S. government is initiating millions of new mortgages, to questionable buyers, at interest rates which can only remain artificially low for as long as the U.S. keeps “buying” all of its own mortgage bonds.
However, this new (and even more fraudulent) bubble is taking place at a time when:
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U.S. mortgage defaults and delinquencies are at all-time record levels
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U.S. banks are holding millions of foreclosed properties off the market
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Millions more homes are already in the “foreclosure pipeline”
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U.S. unemployment continues to worsen (even the phony numbers)
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U.S. banks are still starving the economy of credit
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Record numbers of homeowners are already “underwater”
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A second, larger, worse spike in U.S. mortgage resets is about to begin
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Retiring baby-boomers need to sell at least $1trillion in real estate
Does this seem like the time that U.S. taxpayers should be bank-rolling the entire U.S. mortgage market, with most of those new mortgages being zero down-payment loans (and in many cases to people of questionable creditworthiness)?
Keep this analysis in mind the next time you hear some clueless, talking-head talk about a “bottom” in the U.S. housing market.