Short Memories of the Financial Sub Prime Melt Down

Do you remember the great sub prime and financial melt down of a year ago? Good, do you remember how you dealt with it?

Money Bag of Government Debt

Money Bag of Government Debt

We seem to have short memories in this country. Do you remember the great sub prime and financial melt down of a year ago? Good, do you remember how you dealt with it? Oh, you’re still dealing with it, I see. Are things better now then they were six months ago? No, worse you say? I would have thought your answer would have been somewhat different. I keep hearing on the news that things have turned around and the recession is over, but you say, ‚ÄúNo.‚Äù Well, I asked you about the great financial meltdown and how you survived, because I think we will all need to survive a second wave that is just around the corner.

I think we are headed for a replay of the first meltdown with a slight twist, this time it will be much worse. The weapon of choice for the first melt down was Fannie Mae and Freddie Mac, remember those sub prime mortgages that were bundled and sold creating a global financial mess, a mess by the way that still exist. Some of the players may have changed but overall the game remains the same. Obama and Company have sat with little Timmy and Bennie and devised a plan that is one of the largest roll of the dice probably in modern history. Here’s how it works.

With banks unwilling to lend the Obama administration along with the Treasury and the Fed are working to inflate the housing market here in the U.S. They aren’t using Freddie or Fannie this time around. Their secret weapon this time is the FHA. They are betting that the economy in this country will recover and bail out the sluggish housing market BEFORE the bill comes due on this latest scheme. This is nothing more then another bubble being created and when it bursts, and it will burst, you and I (taxpayers) will be on the hook for another $1 trillion or more in government guaranteed debt. Why are they doing this? As a result of the past melt down in real estate, banks are very reluctant to lend. Our federal wizards in Washington knew they had to keep the mortgage flow running, so they turned to their new “secret weapon”, the FHA. You see, the FHA has been originating new government insured sub prime loans, packaging them into government guaranteed securities for sale to banks. Hello, anybody home? This is exactly what they were doing the first time around with Freddie and Fannie, they are re-inflating a sub prime bubble and it is being done for a couple of reasons.

1. In hopes of finally finding a floor to falling house prices.
2. To allow banks to swap toxic Fannie and Freddie securities for new toxic debt that is 100% guaranteed by you and me, the U.S. taxpayer.

This will almost insure the fall of the FHA and that could sink this fragile recovery, if indeed there is a fragile recovery, and could sink financial markets to new lows. So why did they choose the FHA? Now that banks are so stringent with their lending standards they had to have an avenue of “lax” standards, let’s be honest here, the FHA has always been somewhat “lax” thus making it the perfect weapon of choice.

Continuing on, loans that are insured by FHA are put together, packaged into what is known as MBS, mortgage-backed securities. This is done by the Government National Mortgage Association, commonly known as Ginnie Mae. Ginnie Mae securities are the only mortgaged backed securities backed by the full faith and credit of the US government.

Has this plan been successful? Two weeks ago Ginnie Mae proudly announced that it had issued a monthly record of $43 billion in FHA backed mortgage securities. Ginnie Mae predicted that by the end of 2010 it will exceed $1 trillion of these securities. This is what brought Freddie and Fannie to their knees, and the same will happen to Ginnie Mae.

Their secret weapon, the FHA, is the center piece of this administrations crazy effort to prop up mortgage origination and modifications along with real estate prices and insolvent banks.

The warning signs are already popping up showing that this plan will simply not work. With unemployment and underemployment at the levels they are, the question remains who and how are these loans to be paid back? This new bubble is sure to burst much sooner then the first one. Our economy, or what’s left of it, will not withstand another below the belt punch that is on the way. I think if I were ever in the middle of a huge economic mess, it is now. At least I have you and many other friends with me. Have a great day!

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