The 2nd Bubble

by Bill Sardi

Recently by Bill Sardi: From the Genesis Garden to Galapagos andBack

Someone in the real estate industry is whispering in my ear to say……….. that not only are banks going to write down the principal on home mortgages (hey, act like you can’t make your next payment, and you might get a write down), but the federal government is soon to begin making the down payment for new home buyers (likely to be limited to FHA loans — 3.5% down payment requirement — but who knows, might be expanded), essentially spoon feeding the real estate industry back to pretend vigor.

Bank of America is writing down the principal on selected home loans by 30%. Once again, government is rewarding the irresponsible (half of the home mortgages written during the real estate bubble of 2003—08 took out 2nd mortgages to live like fat cats, and many of these new homeowners put little or nothing down on the mortgage to begin with), and is again encouraging a whole class of people to be duped homeowners as they will face a 30% drop in the value of the home they buy (this will really impoverish them) and certainly have no where-with-all to shoulder the burden of paying property taxes (which is why this is now included in the mortgage payment).

Hey, maybe I can buy a $500,000 home after its value is written down by 30% ($350,000) and the federales will make my down-payment for me and we can throw the centuries-old Judeo-Christian work ethic out the door. My umbilical cord just needeth to be reattached to the God of government.

Of course, usury abounds here, the arrogant bankers still make a killing and now the government underwrites them. But the write down in the value of real estate assets by banks is not only troubling for their financial future, but what about comparables? Real estate appraisers are really going to scratch their heads. Are all homes now overvalued by 30%? Homes certainly shouldn’t sell at the bubble value. If so, American homeowners should demand en masse a reassessment to reduce their property taxes, and then State governments get tanked all at once.

If you think all this is unsettling, Federal Reserve chairman Ben Bernanke now suggests banks keep little or no reserves. Read, in the 8th paragraph of his "exit strategy" speech before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C., where he says the objective now is "to build the capability to drain large quantities of reserves."

Now that means banks can just make all the money they want out of thin air to produce loans? At least a 10% reserve requirement made them restrict their loan pool via fractional banking into something that slightly resembled conservative banking. Is Bernanke sane? The banks wouldn’t need the Federal Reserve at all!

Of course, almost all banks ignored the 10% reserve requirement and stretched credit so far (liars loans) that the only reserves on their accounting books now are provided by no-interest loans from the Federal Reserve, and the Federal Reserve took all the non-performing home loans at Fannie Mae and Freddie Mac and put them on their ledger. If this isn’t cooking the books I don’t know what is.

It’s obvious the $1.5 trillion of real estate loans the Federal Reserve now has on its books is going to be devalued by 40% or more and sold off to hedge funds (every American takes the loss here while friends of the elites in power will pluck and plunder these real estate assets).

If you think about this carefully, the guy who lost his job, couldn’t make his mortgage payment, and lost his home to foreclosure, is now going to pay twice as the losses at Fannie Mae and Freddie Mac kick him in the butt on the way out the door.

Now interest rates on savings accounts at banks have always been keyed to the interest rate on loaned money. But if there is no reserve requirement (the banks wouldn’t need to rely upon your savings account to create a reserve), then what will banks pay citizens to park their money in the bank?

America got into this financial mess with falsely created demand for homes created by cheap money, irresponsible loan qualification, introductory low teaser interest rates, and an unquenching desire for home ownership by consumers. If this isn’t an attempt to create a second real estate bubble, then what is it?

I’ve heard of guys attempting to commit suicide by jumping off a bridge, but I have never heard of that same guy attempting to stab himself on the way down.

The Best of Bill Sardi