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**Sapiens** · July 18, 2007, 09:04 AM

The Great Land Grab of 2007!

Well, I have my answer, this is nothing more than a land grab. Take a look at this:

http://www.boston.com/realestate/new...g_for_housing/

New loan guidance wrong for housing
Mortgage market commentary
By Lou Barnes | July 16, 2007

On Friday, July 13th (of all days), Fannie Mae and Freddie Mac dropped a bomb on weak home and mortgage markets. The new damage will take time to quantify, but may be considerable. The tale behind the act is clear, and just shy of unbelievable.

On Friday, Sept. 29, 2006, the Federal Reserve (joined by all other banking regulators) issued a "guidance" on nontraditional mortgage risks. It demanded that any mortgage containing an interest-only feature be underwritten at the highest possible interest rate or subsequent amortizing payment, and that any mortgage containing a negative-amortizing feature be underwritten at the highest possible balance and interest-rate adjustment.

No consideration for size of down payment or strength of borrower or for length of fixed-rate interval, one-month adjustable-rate mortgages (ARMs) treated the same as 10-year. No thought given to the "option ARM," offered by the trillion since 1980, the oldest ARM in the industry, and not a shred of evidence since roll-out that its option structure had caused outsize foreclosures in any market. I don't like option ARMs and don't sell them (neg-am is too great a temptation to self-deception), and salespeople have abused them, among other things claiming that neg-am helps to prepay loans. It is surprising that the sales propaganda has not done more harm, but it has not.

I read the Sept. 29 guidance that night, and went to work the following Monday afraid, asking our underwriters to evaluate the credit contraction from e-mail bulletins certain to arrive.

The e-mails never came. The industry, increasingly nonbank, Wall Street-based, ignored the guidance. Three months later, OFHEO, the regulator of Fannie and Freddie, sent those two agencies a heated blast demanding a response. Nothing followed. I hoped that the Fed and others had second thoughts, realizing the intellectually lazy foundation for the guidance and its meat-cleaver approach, right out of the rulebook for 1932 bank examiners, requiring rapid foreclosure and seizure and closure of banks.

This winter and spring I called and called, trying to figure out the future of the guidance ... the Fed, OFHEO (no stuffier press offices on the planet; the Kremlin is happier to hear from you), Fannie, mortgage insurers, and got nothing. I do not know what internal politics forced the thing forward, but here it is. Fannie's "Desktop Underwriter" will be recalibrated on July 22 to enforce the guidance.

Two forms of hell will break loose, and one good outcome. The good: the industry will shortly have fewer salespeople, with luck losing the ones who should not have been given a telephone in the first place. Then, quickly, troubled borrowers trying to refi off their subprimes or other re-setting ARMs into interest-only loans to minimize payments will be out of luck. Add to that the rising foreclosure count. Also out of luck, the millions who planned defined ownership periods, safely using 7- or 10-year interest-only loans. Then the families with solid but unpredictable incomes (sales or seasonal, for example), for whom an option ARM was a godsend ... the Fed and its pinched pals just made your lives riskier. It will take a little while longer to assess the harm to housing markets already desperate for demand.

Hell number two may or may not develop, but it will be a special place for the regulators themselves. The Fed and OFHEO have forced this bad idea on Fannie and Freddie, but what of Lehman, the giant Wall Street broker-dealer, proprietor of Aurora Loan Services, the dominant Alt-A mortgage wholesaler/securitizer, and others like it? (Note: the bulk of Alt-A are perfectly good credits, although the class does include junk tiers and trash ones indistinguishable from subprime). Lehman/ALS is not regulated by OFHEO, or much of anybody else except the SEC and NASD. A lot of the non-Fannie/Freddie world uses F&F software engines for loan approval; but, what's to stop the Lehmans from offering back-alley interest-only and neg-am loans? The Fed has done backflips to avoid pointing the predatory-mortgage, suicidal underwriting finger at The Street, where it belongs.

Back to the damage. Subprime lending is contracting fast, both by market and regulatory force, and should. "Back-look" review suggests that perhaps a majority of these borrowers could have been approved for better loans (FHA, outside-edge Fannie-Freddie, especially if mobilizing family help, or doing something crazy like saving a little money), and so the net contraction of subprime purchasing power in troubled housing markets may not be terribly large. This new set of criteria is going to diminish purchasing power among the worst-possible group, the "A"-quality borrower. Some of the diminution will be subtle: if approval for an interest-only or option loan is not available, and a price range therefore out of reach, many buyers will step out altogether.

The most elementary regulatory concept at the end of a credit cycle: Do not make it worse by ex post facto regulation. Do not close the door on a burning barn with horses still inside. Be inventive, careful, delicate and incremental. Develop regulation working backward from actual damage, not Depression-era banking notions of "safety and soundness."

The real housing-market trouble today has been caused by Wall Street's ability to distribute risk beyond Main Street's ability to tolerate temptation and foreclosures. Everyone out here in the real world knows that the foreclosure poster child is the low-down-payment borrower whose income was not properly underwritten. Instead of this miserable affair, you might have banned "no-doc" underwriting of any loan with less than 20 percent down. You might have banned stated-income underwriting for any loan with less than 10 percent down, and for any interest-only or neg-am structure. You might have limited rate adjustments for any loan with a fixed-rate interval shorter than five years, and likewise confined them to lower loan-to-value ratios. Then stopped for a few months to see what happened.

Nope. Meat Axe scores one, Judgment nothing.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com. ***

What's your opinion? Send your Letter to the Editor to opinion@inman.com. Copyright 2007 Lou Barnes

If you don't understand what I mean by land grab, read the article in this post: http://www.itulip.com/forums/showthread.php?t=1235

**Sapiens** · July 18, 2007, 07:37 PM

Why is Our Government Trying to Sell Our Sub-primes to China?

http://www.safehaven.com/article-7982.htm

July 18, 2007

Why is Our Government Trying to Sell Our Sub-primes to China?
by Marty Chenard

A few months ago, the sub-prime problem seemed to be a mammoth problem to many investors.

But ... nothing bad happened, so investors thought that this was another over-hyped problem that really amounted to nothing. Besides, the Fed was being proactive as our big market-protectors, so there was nothing to worry about ... Mighty Mouse was here to save the day.

A week ago, Bloomberg had a little news items that was hardly noticed. In the article, they described how our US Dept. of Housing and Urban Development Secretary (Alphonso Jackson) was in Beijing. His US Government mission was to meet with Chinese banking authorities and ask them to BUY U.S. Mortgage backed securities.

That should have been a "red flag" to American investors. For our government to try and sell our sub-prime mortgages to China suggested that "they are scared as hell" and that they know the sub-prime problems are finally starting to filter down at a visible level.

The first sub-prime bomb went off last night. Bear Sterns announced that their was "little value left in its two failed hedge funds" ... zero value in one, and about 9% left in the other.

Think about it ... Bear Sterns is the second largest underwriter of mortgage backed securities and a very sharp investment house, and they still couldn't control the risk or unwinding of these assets until they went to zero?

Like it or not, Bear Sterns is the tip of the iceberg. Secretary Jackson didn't go to China and beg them to buy our sub-prime problems because he thought it was a good deal for them. He did it because our government knows that we are sitting on a mountain of trouble related to mortgage problems.

It bugs me, that I had to go to the India Daily this morning to find out how much was lost. They reported that 20 billion dollars went to almost zero in value. You would have expected that our media would be screaming about the amount and we should be asking why it wasn't headline news when the two hedge funds had dropped 50% and lost 10 billion.

The incubation time is about done on the sub-primes, and in the next 30, 60, to 90 days ... these problems will begin to unfold and become visible to the public.

For a couple of weeks, I have been mentioning that the Financial sector is in trouble and that this was a problem because the Financial sector represents 20.77% of the S&P 500.

If you recall, last Wednesday we said, "One of the things worrying large investors is fallout from sub-prime loan problems. This concern is reducing investor interest in banking stocks."

Obviously, our stock market won't be happy about it today. As I have mentioned before, the thing to keep an eye on is the Banking Index. Its chart is below ...

Note that the Banking Index is coming to the end of a triangular pattern. If it loses support on the triangle's bottom line, then there is another 4 1/2 year support line just below it.

If that support is broken, then the Banking Index will see a nasty correction, and that will spill over to the S&P 500 and other indexes. Take the time to keep an eye on this index ... its symbol is BKX.

--------------------------------------------------------------------------------

Repeated from last week's posting for your reference:

This chart shows the makeup of the S&P 500 Index by sector. Note that the Financials Sector makes up 20.77% of the S&P 500.

If the Banking index loses support, the heavy weighting it has in the S&P will have a very negative affect on the markets.

Thinking about becoming a paid subscriber? Just go to this link for details on subscription options: Memberships

Marty Chenard
StockTiming.com
Asheville, NC 28805
Tel: 828-296-1200

I see I am not the only one suspecting something amiss about the Chinese money.

**Sapiens** · July 21, 2007, 06:55 AM

Money is Also Destroyed by M.A. Nystrom

http://safehaven.com/article-8000.htm

July 20, 2007

Money is Also Destroyed
by M.A. Nystrom

If money can be created from thin air, the opposite is also true: it can be destroyed as well. Usually it is the Federal Reserve System that does the creating, but the destruction comes by other means. Bear Stearns' hedge fund investors have found this out the hard way. Two of its funds recently went belly up, taking 100% of investors' capital with them. One of the funds, the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage fund, reported $638 million of investor capital in the first quarter. Today nothing remains.

How can money so quickly and effectively be destroyed? To understand this, we have to understand how the money was created in the first place. According to news reports, the underlying securities in the hedge fund in question were subprime mortgages.

Mr. Jones Takes out a Sub Prime Loan
Let's say it's 2003, and Mr. Jones, who has less than stellar credit wants to buy a house. He goes to the bank to get a mortgage. The conventional wisdom is that the bank loans him money so he can buy the house. In reality, Mr. Jones is actually borrowing the money from himself, -- or rather against his own future earnings. The bank simply facilitates the real estate transaction between him and the house seller. It does this by writing a note that says 'we've loaned Mr. Jones X dollars and he's promised to pay us the money back over 30 years. We are holding his house as collateral until the money is paid back.' This note is called the mortgage, and it becomes the bank's asset. Under Federal Reserve rules, it can use this asset to create the money to pay the seller of the house.

In reality, the bank has no money, and the mortgage has value only because of Mr. Jones's promise to pay back the money. As long as Mr. Jones's promise is good, the mortgage will retain its value and the bank can sell it to another investor - for example a hedge fund.

The Hedge Fund Buys Mr. Jones's Mortgage
The hedge fund bought thousands of mortgages like Mr. Jones's, with the hope of collecting a steady stream of income as borrowers paid off their mortgages. That sounded like a good idea, and a solid bet. People traditionally are very good about paying their mortgages back. No one, after all, wants to lose their home. In fact, it sounded like great idea - so great in fact, that Bear Stearns took the $638 million of its investors money, borrowed $10 billion more, (yes, that is a b) and put it all into subprime mortgages.

Mr. Jones Defaults
As it turned out, Mr. Jones, and many more like him were unable to keep their promises to pay the money back. Maybe Mr. Jones lost his job in this terrible economy; maybe he got sick and couldn't work; maybe he didn't understand that his mortgage payment was going to jump to something he couldn't afford; maybe he thought he could sell the house for more money, and never expected to hold on to it this long; maybe he just wasn't a good credit risk to begin with.

Whatever the reason, Mr. Jones and millions like him had to break their promises about paying back the loans. In the end they'll just give their keys back to the bank and say, "Thanks, but no thanks. I can't afford it."

The banks in turn will say, "Don't give us the keys. We sold your mortgage a long time ago. We don't even know who owns your mortgage now, and frankly we don't care."

Until now, his debt was an asset of the fund, and was being used as collateral against loans ten times its value. But the moment that Mr. Jones gave up on the idea of home ownership, the value of his mortgage simply disappeared. The paper asset, which derived its value from Mr. Jones's promise, was destroyed. This had a cascading effect, since Mr. Jones's mortgage was being used as collateral to borrow money to buy even more subprime mortgages, many of which were also defaulting. Assets purchased on borrowed money were now worthless. Only the debts remained, and suddenly there was more debt than the original amount that investors had put into the fund. These original funds would be needed repay the debts incurred by the fund. Nothing is left to return to investors. This is the process by which money is destroyed.

What about the houses, you ask? Yes, they have some value, but not nearly as much as when they were first purchased. Again, it was not the houses that had the value, it was Mr. Jones promise to pay a steady stream of high interest income over 30 years that was valuable to investors.

American Dream, Up in Smoke
Not only is the money gone, but so are the dreams of those millions of homeowners. The decision to purchase a home is not made lightly, and is usually accompanied by great hope and optimism. Defaults are the opposite. As the collective mood of millions of people like Mr. Jones, (not to mention the investors in the hedge funds who also lost everything) shifts from exuberance and optimism to negativity and pessimism, it is reflected in the larger economy as financial losses. This is a major aspect of the Wave Principle, which predicts tough times ahead.

Inflation and Deflation
The Federal Reserve System has systematically inflated the money supply since 1987, causing tremendous inflation. Along the way, money has also been destroyed, most memorably during the dot.com collapse of 2000-2003. This process of destruction is part of the reason why the economy has not experienced true hyperinflation.

In fact, a key point here is that the Fed is not really creating money, but credit. In truth, money is a physical commodity. Credit is simply the ability to buy something. Today credit functions as money, so it is difficult to tell the difference, but this was not, and will not always be the case.

If the Fed had actually printed bills (rather than made electronic book entries) for each dollar it created, those dollars would still be circulating in the economy and inflation would be much higher. As it is, the Fed can create credit, and those closest to the source of that credit creation - banks and government contractors - reap the greatest benefits. As the credit works its way through the system, it 1) causes general inflation, and 2) finds its way into weaker, less experienced hands - the likes of Mr. Jones and his subprime mortgage, or the average investor chasing internet stocks. In these weak hands, it can easily be manipulated to destruction.

Through this process of destruction, runaway money supply growth can be controlled. But if the destruction process gets out of hand, it is possible that we could see the reverse of what we have seen over the past twenty years - a prolonged period of sustained deflation. This could happen if people's preference for assets over debt shifts along with the social mood. Recall that the value of paper assets is only as good as the promise standing behind them. Bear Stearns promise to investors rested on the promises of millions of people like Mr. Jones to continue paying their mortgages. Its not that they didn't want to pay; economic conditions and the way the mortgages were written made sure that they couldn't. If people like Mr. Jones become unwilling or unable to borrow, and if hedge fund investors who lost everything become to skittish about borrowing, the Fed will have a more difficult time increasing the money supply, since all credit creation today comes via debt creation.

The most recent issue of the Elliott Wave Financial Forecast, which remains a steadfast proponent of deflation, (available here, sign in required) made this observation earlier this month:

"When Merrill Lynch announced that it planned to sell the securities in [the Bear Stearns hedge fund] on the open market, Bloomberg reported that the "threat is sending shudders across Wall Street." Why? "A sale would give banks, brokerages and investors the one thing they want to avoid: a real price on the bonds in the fund that could serve as a benchmark."

Later that day, Merrill decided against an open market sale. Retuters described the episode this way: "If word of the exact nature of the losses became public, it would have forced many other funds to revalue their holding and perhaps lose money, setting off a domino effect that could rattle markets globally."

How much value, based on how many broken promises, has already been lost but not yet revealed? As long as financial prices rise (as they have continued to recently) no one is interested in such questions. But in the end, an ever inflating money supply is simply unsustainable. Money must also be destroyed to maintain equilibrium.

In his most recent testimony before Congress, Chairman Bernanke reiterated that inflation is the Fed's foremost concern. For the time being, the Fed is holding interest rates steady. If it can hold the line, and allow the market to continue on its destructive path, inflation can be contained. The risk is that the destruction gets out of hand, and becomes full blown deflation.

Comments on this piece are welcome here: No need to register to post. Also feel free to email me.

Click here to access the EWI Free week reports on the US Market.

Michael Nystrom
Editor
www.bullnotbull.com

from the comment section:

sb July 20, 2007 11:09 am
What do you mean by this:

The conventional wisdom is that the bank loans him money so he can buy the house. In reality, Mr. Jones is actually borrowing the money from himself, � or rather against his own future earnings. The bank simply facilitates the real estate transaction between him and the house seller. It does this by writing a note that says �we�ve loaned Mr. Jones X dollars and he�s promised to pay us the money back over 30 years. We are holding his house as collateral until the money is paid back.� This note is called the mortgage, and it becomes the bank�s asset.

The Seller of the house gets a check from the bank. If he so chooses, he can cash that check and walk away with $200,000 in his pocket - courtesy of the bank. It seems to me that there is real value here for the seller and for the bank, which has a right of foreclosure.

And this:

What about the houses, you ask? Yes, they have some value, but not nearly as much as when they were first purchased. Again, it was not the houses that had the value, it was Mr. Jones promise to pay a steady stream of high interest income over 30 years that was valuable to investors.

The holder of the mortgage can foreclose - sell the house and get cash. Again, there seems to be real value in actual capital here - not just debt.

Anyway, you kind of lost me in those paragraphs. Could you explain it more clearly?

Michael's reply:

Michael Nystrom July 20, 2007 8:22 pm
SB: When you say:

The Seller of the house gets a check from the bank. If he so chooses, he can cash that check and walk away with $200,000 in his pocket - courtesy of the bank. It seems to me that there is real value here for the seller and for the bank, which has a right of foreclosure.

You are absolutely correct. The bank can give the seller $200,000 in cash, only because it has acquired an asset which is of greater value than $200,000. That asset is Mr. Jones�s mortgage. The bank can create new funds equal to 90% of its assets on hand. Because Mr. Jones will pay back well over that amount in time when interest is included, the mortgage is worth over $200,000, so it can create the new cash to pay the seller on the spot.

The seller has no right of foreclosure - the seller has gotten his money and is done with the transaction. He is out of the picture.

Also, when you say, �The holder of the mortgage can foreclose - sell the house and get cash. Again, there seems to be real value in actual capital here - not just debt.� Again you are correct. In my example, the mortgage holder is now the hedge fund. It can get the house back, but it is unlikely to be able to sell the house for what it did the first time. First, the market has cooled off. Second, when owners lose their homes to foreclosure, they often do quite a bit of damage to the property. One trick I�ve heard of is to put cement in the drain pipes, then turn on the water on their way out the door.

In the mean time, the hedge fund has loans outstanding ($10 billion), and the banks that loaned the fund the money didn�t get into the business to become home rehabbers! They want quick money, and they won�t patiently sit around and wait for the market to come back. That isn�t how the banks operate.

My primary point of this article was this: It is not the house that has value, nor the mortgage that has value per se; it is Mr. Jones�s promise that is the basis for all the value creation.

I hope that that has answered your questions. Thank you for asking them.

Best regards,
Michael Nystrom

**zoog** · July 21, 2007, 10:46 AM

Re: Money is Also Destroyed by M.A. Nystrom

The Federal Reserve System has systematically inflated the money supply since 1987, causing tremendous inflation. Along the way, money has also been destroyed, most memorably during the dot.com collapse of 2000-2003. This process of destruction is part of the reason why the economy has not experienced true hyperinflation.

Ah, interesting statement.

**Sapiens** · July 21, 2007, 11:38 AM

Re: Money is Also Destroyed by M.A. Nystrom

Originally posted by zoog View Post

Ah, interesting statement.

Yes, indeed. Once you understand the illusion, depending on your nature and constitution, very exhilarating!

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