Pedestrian Observer GB: Bush/Paulson Bailout Plan

Have we reached the worse or is this just the beginning of a financial meltdown? The US$700B Bush/Paulson Bailout Plan is a drop in the bucket if we look at the magnitude of the problem.

Rosa Brooks in her LA Times article “Keating 5 ring a bell?” succinctly describes the root cause of the the S&L and today’s financial crisis ….. a lethal mixture of Deregulation and Greed, to quote:

Today's meltdown began when unscrupulous mortgage lenders pushed naive borrowers to sign up for loans they couldn't afford to pay back. The original lenders didn't care: They pocketed the upfront fees and quickly sold the loans to others, who sold them to others still. With the government MIA, soon mortgage-backed securities were zipping around the globe. But by the time many ordinary people began to struggle to make their mortgage payments, the numerous "good" loans (held by borrowers able to pay) had gotten hopelessly mixed up with the bad loans. Investors and banks started to panic about being left with the hot potato -- securities backed mainly by worthless loans. And so began the downward spiral of a credit crunch, short-selling, stock sell-offs and bankruptcies.

To gain back investor confidence the Bush/Paulson Bailout Plan of which details remain unknown to the public where the Mortgage-Back Security will be dumped seems to have been approved in principle by Congress but it seems Republicans could not agree on how it is to be structured. The Democrats will not take the initiative in a Republican Bush/Paulson Bailout proposal and rightly so since this debacle is under Republican Bush tenure. This is a scary scenario and outrage from the public is starting to unravel on the bailout plan despite reassurance from the president that the aim was not to bailout Wall Street preferred corporations remains to be seen.

Karl Denninger of Fed Up USA explains why Federal Reserve Chairman Ben S. Bernanke signaled that the government should buy devalued assets at above-market values to make its proposed $700 billion rescue package most effective in combating the financial crisis is wrong below:

These "hold to maturity" prices are fictions. Let's take the "average" $700,000 house in California. The buyer made perhaps $100,000 a year, or $8,333 gross (before taxes.) Removing FICA and a 25% marginal tax rate from the gross leaves you with about $5,500; the payment is $4,630.11.

Can you survive with less than $900 a month for car payments, food, utilities, homeowners and car insurance and electricity? Good luck.

So instead nearly all of these people took Option ARM mortgages and in many cases they also took a "piggyback" second mortgage to get around "maximum LTV" restrictions on the Option ARM.

But the house was overvalued by 150%, selling at nine times average incomes instead of three and a half times. It has now fallen in value from $700,000 to $500,000, but has another 30-40% to go, and will eventually bottom out in the $300,000 range.

The first mortgage is in fact worth about 70 cents now, but will be worth 40-50 cents in a few years. The second is a zero, because until the first is paid off, its worth nothing, and the first has no chance of ever being paid off.

This is why the market prices are in fact not wrong.

Pointing fingers on where the blame lies is just not going to cut it among the buyers and sellers of Mortgage-Back securities using such lame excuse of non-disclosure while this is a must buyers of these papers should have done their due dilligence since it was someone else's money. The housing mortgage meltdown runs to trillion of dollars and looking at this OC Register report on the problem from a mortgage fraud expert Bob Simpson should give us a hint on how screwed the system is:

Q. Do you think the government should help people with loans they can't afford?

A. The wild card is if you paid $600,000 and your neighbor's gone into foreclosure, and it's the same house and you can buy it for $450,000. Do you get it and walk away from your current house and give yourself a $150,000 gift? Even if you can afford your current house, if your home value's down 30 percent, why not walk?

Q. How will the government figure out what to do?

A. Paulson said let's get to the homeowners later and worry about keeping the financial system greased first. Barney Frank (Chairman of the U.S. House Banking Committee) said let's not help the speculators. But be honest, who in California in the last 10 years wasn't a speculator? Now the government has to decide: Do you stay in that house? Who's Solomon among us? That's a bloody business and it should be left up to people at the kitchen table, saying, "Honey, do we own or do we go back to renting?"

Q. At what point are prices going to stop falling?

A. I'd ask what's the median income in Orange County? I'd say multiply that by three or four and that's the median home price. That's about $300,000. Right now, anyone who bought their home since 2003 has lost money. … I've been on record that the median is going to return to 1999 or 2000 or worse. That's about $300,000.

How many homeowners bought in good faith and did not succumb to speculation is the trillion dollar question and when Simpson was asked on the number of fraud, here is his take:

I asked a friend, a good guy, "Have you originated an honest loan in the last five years?" And he said: "The lenders deserve everything I gave them." I think that the majority of stated-income loans are fraud. There's a report by the Mortgage Asset Research Institute on fraud, which said 60 percent of stated-income borrowers inflated their income by more than 50 percent. So that means someone who makes $5,000 says they make $7,500 a month. That means there are people with $5,000-a-month incomes with $2,500-a-month payments. There's no way they can pay that much.

Now how about the ethically challenge and criminal minded out to game the lax lending system? I dare to say that there are a number of people out there who made a killing like the Family that flip houses together bilking Washington Mutual with millions of dollars. Below is an article from OC Register that has not been picked up by major dailies:

In July 2007, Vijay and Supriti Soni of Corona del Mar paid $440,000 for a home at 2129 W. Civic Center Drive in Santa Ana.

Five weeks later, they resold the house to Javier Hernandez – the family gardener and handyman – for $660,000. That's a 50 percent gain in 38 days – at a time when real estate prices in Santa Ana were plunging.

But the lender that financed both mortgages – Washington Mutual Bank – took a bath. In March of this year Hernandez's loan went into default and in July the bank foreclosed. On the trustee's deed, the bank listed the home's value at $377,137 – $220,000 less than the outstanding loan.

Records show that Washington Mutual, America's largest savings and loan and one of its most precariously perched lending institutions, financed at least 43 mortgages worth $24.5 million on properties bought and sold by members of the Soni family since early 2007.

Huh? A gardener and handyman buying a $660,000 home, well blow me down and slap me silly I did not realize that a gardener handyman earn six figures nowadays. Now how can the bank not have noticed such blatant fraud in the transaction is beyond belief so how many of these types are included in the bailout package? FHA prohibits flipping within 90 days but that did not stop the family that flips together from flipping properties selling within the family which is really ridiculously absurd. How they got away from their criminal activities tells you how greed took over ethically challenge people. What is really unnerving is the fact that the Sonis had already been convicted in 2003 of numerous felonies for a real estate fraud scheme and they are back in court.

As I wrote this WAMU (Washington Mutual) the ethically challenge "professionals" preferred lender went bankrupt. No surprise there when you consider how they dealt with fraud due to lax lending guidelines and even legitimate loans they held are risky due to the real estate prices taking a nosedive where no one knows for sure where it will settle.

If you are sickened and disgusted which we should be, there is a site where America Says no to Bush Bailout! You can find mass action in your area here or schedule and organize your own activities to stop the madness.

Watch the Videos...... Bailout - Con Job of the Century

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