Soros on Fannie/Freddie

This particular article is so wonky even I had trouble following but here is Soros' plan for removing Fannie/Freddie from mortgage financing.

The first is to introduce mortgage securities based on the Principle of Balance. GSEs could, and should, do this, with the government regulator setting clear and conservative standards. No legislation is required.

The second step is to open the process so all qualified MCIs can issue POB bonds. To make this market work, this means new law requiring that MCIs maintain skin in the game for any federally guaranteed mortgage.

After that, the GSEs could be phased out from their role as MCIs, and the guarantee function hived off to a government agency. Eventually, the GSEs would be liquidated, as their portfolios run off.

Legislation would also be required to extend the POB system to areas that government insurance does not cover.

In fact, legislation authorizing “covered bonds” is making its way through Congress.

This is based on a system in Denmark in which individual loans become bonds that can be bought back.

Loan Modification Plus

The Obama administration has taken the lead from Bank of America and Citigroup and expanded its loan modification program to include writing down some mortgage balances.

The multifaceted effort will let people who owe more on their mortgages than their properties are worth get new loans backed by the Federal Housing Administration, a government agency that insures home loans against default.

That would be funded by $14 billion from the administration's existing $75 billion foreclosure-prevention program. But it could spark criticism that the government is shouldering too much risk by taking on bad loans made during the housing boom. In addition, their existing mortgage companies will be able to receive incentives to lower their principal balances.

The program also includes assistance to help unemployed homeowners keep paying their mortgages.

Last summer, Deutsche Bank came out with a startling study about so called underwater mortgages.

A report put out by Deutsche Bank is creating all sorts of business buzz. That's because the report predicts that 48% of all mortgages will be "underwater" by the end of the first quarter of 2011. A mortgage that is "underwater" is one where the mortgage is larger than the value of the house. These sorts of mortgages have a significantly higher incident of defaults. Currently, the number of properties that are underwater is estimated to be at 26% by Deutche Bank. That's bad enough but their estimation is just down right scary at 48%. All mortgage types will see increases in "underwater" mortgages and even prime loans will have 41% of their mortgages under water. (currently on 16% of prime loans are underwater)

This phenomenon, where borrowers owe more than the home is worth, became the elephant in the room. None of the programs helped these sorts of borrowers and this particular study showed that a substantial number would soon be underwater.

This became a central problem for all loan modification programs. With nearly fifty percent of all mortgages soon to be underwater, no loan modification program would do much unless there was something in there to help them.

The problem is that in order to help these folks you'd not only need to lower their rates but the amount they owed. Loan modifications are already inherently open to so called moral hazard. That is that they reward bad behavior. If these borrowers' balances are lowered along with their rates that makes that phenomenon even greater.

So, the original loan modification program put out last spring didn't include any mortgage that was underwater. The Deutsche Bank study showed that such a program wouldn't do much. So, the administration has expanded their loan modification program to include some of these.

This is exactly what Wade Rathke has been calling on for months.

But for many the chairs in the church haven’t changed. Bruce Marks of NACA and John Taylor of the National Community Reinvestment Coalition have been long allies, and not surprisingly their position mirrors mine: there have to be write downs. Jack Schakett, formerly of Countrywide and now in about the same job with Bank of America concedes, as he always has, that there is a place for write downs, and believes they should be extended. Wells Fargo, as always, continues to keep its head in the mud and believe that someone else will solve the problem they helped create.

...

But, in this world, 7+ million underwater borrowers are crying for a solution, and writing down principle owed still seems like the only horse to ride.

The payment reduction some of these borrowers would receive could be more than fifty percent. Many of them simply over bought. Most would get a deal a borrower that is on time would never get. This dynamic was at the heart of the mortgage class war that I predicted that I believe turned into the Tea Party movement. There's a bigger problem. It's of policy. I've often quoted this Wall Street Journal article.

Is a housing bailout the solution for clogged-up credit markets and a faltering economy? What the Fed has been doing and did again yesterday hasn't really worked, notwithstanding the pops it produces in the stock market every time it shovels liquidity into the system. The Fed's latest move provides financial institutions another $200 billion in direct short-term lending against their unsaleable housing collateral. The Dow Jones jumped 416 points. But it won't restart markets for the underlying collateral.

Where are the speculators, vultures and hedge funds? Where are the big money players willing to buy the exotic but still substantial mortgage-backed securities for which markets have ceased? The Fed's liquidity rush seems only to have convinced them the time is ripe for staying on the sidelines.

To get to a real solution, speculators and investors need to believe that home prices are hitting bottom, that any mortgage debt they might buy today for 80 cents on the dollar today won't be worth 30 cents tomorrow. Then the vultures will pile in: The transfer of wealth from the overleveraged banks and hedge funds to those who kept cash handy will be shocking, ugly and cathartic -- but it will also be relatively quick. Credit markets will begin to function again. The economy will grow.”

Until there is a bottom, there are no "vultures". Without "vultures" there is no recovery. Loan modifications artificially prop up markets. There is no bottom.

An Insider's View of Mortgage Fraud

Al Lewis had done a great job of uncovering a story that should help explain how this whole mess happened.

HR lady pulled Michael Walker into a room and told him he was fired.

The reason: Talking to the FBI. It was a violation of the company's privacy policy.

"I was stunned," Walker told me. "I couldn't believe it. But that's what she said."

Walker, a "high-risk specialist," was then walked out of the building as if he were the risk. His job at Aurora Loan Services LLC, Littleton, Colo., ended on Sept. 4,
2008.

This story is about Michael Walker. Walker worked as a fraud specialist for Aurora Loan Services. Auroro was a subsidiary of the now infamous Lehman Brothers. Aurora had a solid nitch in some of the exotic Alt A loans. Aurora was doing a lot with stated and no and little money down loans. Aurora was also a wholesale lender. That meant that they were getting their loans through mortgage brokers.

Walker was investigating income fraud and so called "straw buyers". Straw buyer are those with good credit put forth to buy a property as a front because the real purchaser had some sort of credit or income issue. Another common scam was to have the same buyer buy several properties all at once and claim all as primary residences because those got the best terms.

Walker was busy. That should surprise no one. If you specialize in stated and low money down loans, you simply invite fraud. As such, he eventually compiled such a massive list that he was contacted by both the IRS and the FBI. For speaking to them, Aurora was fired. That should also surprise no one. That's standard operating procedure for all corrupt firms to deal with whistle blowers. As soon as Walker went and spoke with the feds, he became a whistleblower. He was dealt with.

It's also symptomatic of what was happening at the height of the boom. Many banks convinced themselves that the fraud was fine. These loans were selling. The property values were booming. As I've said before, if you give someone a stated loan with no money down, it's actually a good deal for you if you know that you will have 20% equity in six months. That's what was happening. As such, many banks didn't necessarily want to find too many problems in their portfolios. Finding too many problems might have rocked a boat they didn't want to rock.

Walker was rocking the boat and he was dealt with. Aurora loan services is no longer in business.

Soon The Banks Will Be Between a Rock and a Hard Place

The White House is concerned that their loan modification program is floundering and so they're about to put more pressure on the banks.

The Obama administration will crack down on mortgage companies that are failing to do enough to help borrowers at risk of foreclosure, as part of a broad effort to boost participation in its mortgage assistance program.

The Treasury Department said Monday it will withhold payments from mortgage companies that aren't doing enough to make the changes permanent. Officials will monitor the largest of the 71 participating mortgage companies via daily progress reports.

The goal is to increase the rate at which troubled home loans are converted into new loans with lower monthly payments. At the end of October, more than 650,000 borrowers, or 20 percent of those eligible, had signed up for trials lasting up to five months.

To understand just how dangerous this and how much unnecessary pressure this will put on banks first you should understand the process by which banks approve loan modifications. Loan modifications require most of the same paperwork as a regular loan: pay stubs, bank statements, w2's, etc. It also requires a full budget filled out by the borrower and it requires a letter explaining why the current mortgage payment is too high. (I often refer to this as the sob story) This may not seem like a lot but a file that is appoved is often the size of one section of an encyclopedia by the time it's done.



Second, you must all understand that the approval for a loan modification is nearly the exact opposite of the approval for a regular loan. Whereas on a regular loan, you want everything from income to credit to assets to be maximized, you want that to be minimized in a loan modification. At the same time, you don't want a totally hopeless situation since that's a sign of someone totally irresponsible and unfit for a loan modification. At the same time, the government has created its own rules. For instance, the modified loan can't go below 2% and still has a front end ratio of 31%. (by this I mean the housing payment, mortgage taxes and insurance) So, for a bank, figuring out if a loan should be approved is a delicate process.



Finally, loan modifications, on this scale, are totally new. Banks have no bureaucracies for them. They are creating them as they try to approve these loans. At the same time, they are working closely with the federal government and Fannie/Freddie for the first time on this issue. As such, you are asking multiple bureaucracies to work together. We can all imagine the bureaucratic nightmare that creates.



I'm not here to defend the banks. I have no use for banks. I don't care how difficult it is when it takes six months and more, as it often does, there's no excuse. Still, these banks are dealing with a brand new process, that's very complicated, and involves multiple new bureaucracies. Most importantly, it goes against every business instinct for banks to approve a loan modification. After all, you're approving someone entirely based on their current inability to pay.



Now, the White House will try and embarrass all those banks that aren't approving enough. Those banks will be put on some list for all to see. It's sort of like being put in the middle of the town square during the Middle Ages. Banks will want to do everything to avoid being on this list. Doing this means approving more loan modifications.



Now, think about the difficult, confusing, and new process I just described. Add to this directives from banks to the people in charge of processing these loan modifications to get more of them done. What you'll have carelessness and speed into a process that complicated and chaotic. That will mean a lot of people that shouldn't be approved will be approved. This will expose the process to a great deal of fraud. If banks are fixated on approving as many as possible, they will be extremely susceptible to being taken advantage of.



It remains to be seen if the White House will be effective in intimidating the banks. If they are, however, you can bet that will be a decision that we will all regret. That will unleash a terror in the loan modification market that we will all regret. I was always against the proliferation of loan modifications. They have an inherent moral hazard. They are wraught with potential fraud. Now, the administration is determined to make sure that all my worst loan modification nightmares come true.

Target HUD

Here's what you'll find at the top of the ACORN Housing Inc. website.

President Obama formally announced this morning a new $75 billion dollar plan designed to help families prevent foreclosures and stabilize hard-hit communities. The Homeowner Affordability and Stability Plan includes a loan modification program, which provides incentives for lenders to modify the loans of borrowers who are at risk of foreclosure because their incomes are not sufficient to make their mortgage payments. It also includes refinance opportunities for borrowers who are current on their mortgage payments but have been unable to refinance because their homes have decreased in value.

ACORN Housing Corp and other non-profit HUD-certified housing counseling agencies will be helping borrowers access these programs. While the program will not officially go into effect until March 4th 2009, homeowners can get started on the process NOW by filling out an application for assistance from ACORN Housing. The application is available online at http://www.acornhousinghelp.org/ or by calling 888-409-3557.

There is no fee to participate in this new program or to receive counseling from ACORN Housing. Please beware of any companies that charge you money to provide housing counseling or help modifying a delinquent loan, especially any that ask for an upfront fee.

So, as we speak, ACORN Housing Inc. is a prominent player in the administration's $75 billion loan modification program. Long term readers should not be surprised about this. I first pointed to this portion of the site in June. I'd like to say that I am ahead of the curve but in this case another adage holds true. That is that a picture is worth a thousand words. What's changed is a set of videos like this one.


With these videos, ACORN Housing Inc has gained national prominence, or better yet infamy. Suddenly, their relationship to all sorts of powerful folks is under a new microscope. The census bureau cut ties with ACORN yesterday. Now, the spotlight is on HUD and it's relationship with ACORN Housing Inc.

Conservatives have cheered the Census Bureau's decision to sever ties with ACORN because it had lost confidence in the group, but the hidden-camera videos that prompted ACORN to fire four workers this week could raise more questions about the federal funding ACORN receives for housing outreach.

ACORN Housing Corporation received $1.6 million to provide housing services to low-income communities in this fiscal year, ending Sept. 30, according to USASpending.gov, a federal government Web site for tracking government grants.

The Department of Housing and Urban Development Grants has given $8.2 million to ACORN in the years between 2003 and 2006, as well as $1.6million to ACORN affiliates.

ACORN receives millions to be a HUD approved counselor for the President's $75 billion loan modification program. It is these very counselors that counseled the supposed prostitute how to buy a home and use it as a brothel. At this point, there's no defense for HUD keeping ACORN on its approved counselor list. ACORN also works with several localities, including New York City, Philadelphia and St. Louis, in the same function.
HUD itself is not without its own problems. Here's a story I did at the beginning of the year.

Yet, it's likely that HUD is the biggest shakedown artist of them all. Of course, again, the nature of the beast says that we'll never know just how much of this they have done, but let's put Kendrick's bio into a new context. Only one accused individual would speak to me. Even they made me swear to keep their case as vague as possible. Here is the only way they would allow me to describe their current situaiton.

One real estate professional told me that he is being targeted by HUD for discrimination. He was never presented with an accuser, nor a specific accusation of discrimination, only "it has been alleged". He not only denied the allegation, but communicated that he had actually done a large portion of their business with those he allegedly discriminating against. Despite this, the entity has been "asked" by HUD for a several thousand dollar cash "donation" because of this "alleged" violation, even before HUD went forward with the full investigation of the COMPLAINT!! Worst of all, the initial correspondence was initiated on stationary by COMPLAINANT Kim Kendrick herself. Because the case continues in litigation, the entity has asked me to keep their name outof the story. This individual did tell me that they received a letter similar to the one Bader received. Furthermore, the complaint only asks for a few thousand dollars, so why is the complaint letter coming from the office of the top deputy at HUD, Kim Kendrick.

HUD is notorious for running a racket in which they shakedown those in real estate. They find any advertisement or other professional correspondence and try and find language that can be construed as "discriminatory". In the example I gave, a realtor started a site called Christian Realty. HUD claimed this discriminated against all other religions and they demanded that he pay a fine. Often, HUD hires out third party groups to scour the ad pages and the internet for anything that can be construed as "discriminatory". Yes, often one of those groups is an ACORN affiliate just like ACORN Housing. As such, right now, HUD is paying ACORN to find unsuspecting individuals, organizations, and companies that can be targeted, accused of discrimination, and ultimately those groups will pay some hefty fine to HUD.

Bill O'Reilly said that in light of the investigation that ACORN can no longer receive any more government funds. Most of us have been saying this long ago. The census has already cut off all ties. HUD needs to follow and the rest of the government right after that.

The U.S. Treasury Bond Can Bring Obama Down

The biggest financial news of th day was the disastrous performance of the Ten Year U.S. Treasury Bond offering today.

US Treasury prices fell on Wednesday, sending benchmark yields to eight-month highs, after an auction of 10-year notes heightened concerns about the cost of financing the burgeoning U.S. budget deficit.

It was the first test of the government's long-term borrowing ability since investors began to wonder last month whether the United States' prized AAA credit rating may be living on borrowed time.

This continues a trend now more than a month of the U.S. Treasury bond rate shooting up. Today's offering is more evidence that the market will make the government pay to borrow the amount of money that President Obama is determined to borrow.



To put things into perspective, at the end of April, Ten Year U.S. Treasury Bond rates were at about 3%. They are now trading just below 4%. With this, mortgage rates have gone to just below 5%, to about 6%.



The short term effect will mean a very bloody month of June for real estate. Between long waits and exploding interest rates, I expect millions of loans to blow up as locks expire. This will be clear in both mortgages closed, which will plummet, and in real estate prices, which will take a massive hit this month.



In the more intermediate term, I expect the benchmark ten year U.S. Treasury bond to hit 5% before the end of the summer, if not sooner, unless the President announces he is reversing course on some of this spending. The bond offering today is only the beginning and this bond offering is saying the same thing they've all said recently. The bond market is telling the president that borrowing trillions will be very expensive.



The ramifications for the entire economy will be massive. A ten year U.S. Treasury bond at 5% means mortgage rates at 7%. That means the average borrower would pay about $400 a month more on a $200,000 mortgage over their lows at 5%. That would trigger further declines in real estate values, increases in defaults, and of course increases in foreclosures.



This would also translate into higher rates on car loans, student loans, business loans, and frankly all other loans. Raising borrowing costs somewhere around 2% means whatever jobs will be "saved or created" by the stimulus, will be overwhelmed by the lost jobs that higher borrowing costs will mean.



If the Republicans have any political savvy, they will coordinate a full attack on Obama's economic policies as soon as the Treasury hits 5%. By then, there will be no getting around what his policies have created. About two in three people on their own home or property (condo, two unit, etc) Even if they aren't now buying, selling or refinancing, a homeowner is acutely aware of what higher mortgage rates mean to them. Many homeowners are aware of what property values are doing in their own areas. As they see property values falling, they will be able to make the connection from that to rising mortgage rates.



Furthermore, the move of the treasury from 3% to 4% is a business story. Once it moves to 5% it is a news story. The public will be engaged. Furthermore, it is a simple story to tell. The president borrowed money we don't have. That raised all borrowing costs. Now your car loan, student loan, home loan, and business loan are more expensive.



If the Republicans are really politically savvy, they will put the fear of God into all. They need to get on every media that will have them and make the case that unless Obama's domestic agenda is stopped, interest rates will continue to go up until our economy collapses. That's not so far from reality. Today's bond offering was only $19 billion. Obama wants a trillion plus more. You do the math. Republicans need to get behind a populist movement to repeal the rest of the stimulus.



This is also an easy story to tell. The stimulus hasn't created any jobs. It has, however, raised rates, by then, two full percentage points. That hurts the economy and causes us to lose jobs. In order to get out of the recession, we need borrowing costs minimized. The only way to minimize them is to repeal the stimulus. By doing so, the President's entire agenda, platform, and economic policy would be wholly rejected. To do this, the Republicans would need to create a grass roots revolt. Of course, nothing is as motivating to a revolt as seeing your mortgage rate go up 2% in the span of four months.

The Case Against Inflation

It should be noted that it is clear that Steve Chapman is a monetarist. That is someone that favors monetary policy over fiscal policy. It's further clear that he views the response to this crisis from the perception of someone that believes that monetary policy is the best approach to fixing things.

In this article, Chapman makes the case that a policy that stimulates inflation maybe the best approach to dealing with the crisis. First, he makes an argument that I agree with in arguing against the current policy.

Faced with that looming catastrophe, the federal government has been considering or doing things that were once unthinkable -- partly nationalizing banks, buying up debt, bailing out the Big Three automakers, spending hundreds of billions of dollars on infrastructure and doubling or tripling the budget deficit.

It's possible these measures can restore the economy to health. But only possible. What is certain is that they will produce a government that is bigger, more expensive, more overextended and more involved in the operations of private businesses. That result, rest assured, will live on after the crisis is over.

Chapman is, I believe, absolutely correct that the current approach will massively expand government bureaucracy, power and reach. Furthermore, I believe he is correct in pointing out that all of these things will continue long after this crisis is over.

Yet, Chapman proposes a policy that is also wraught with problems.

So some economists have concluded that expanding the money supply is the worst option except for the others. Kenneth Rogoff of Harvard writes that "a sudden burst of moderate inflation would be extremely helpful." Casey Mulligan of the University of Chicago says, "Inflation will alleviate some economic problems; prolonged deflation will aggravate them."

Gregory Mankiw, who was chairman of the Council of Economic Advisers under President Bush, urges the Federal Reserve to abandon price stability and commit itself to modest inflation. David Henderson of the Hoover Institution says that if the choice is more federal spending or rising prices, he prefers the latter.

It's not hard to see why. Most of our problems stem from the bursting of the housing bubble. That sent home prices plunging, which reduced the value of mortgages and mortgage-backed securities, which caused losses at banks, which forced a cutback in lending, which squelched consumer spending, which brought the economy to a halt. Which started the whole miserable cycle over again.

Chapman essentially calls on the Federal Reserve to turn on the money machine and simply create money. It just so happens that the Wall Street Journal had an article today that analyzed all the problems with such a plan.

Mr. Bernanke has good reason to worry about the economy. We all do. In the boom, a superabundance of mispriced debt led countless people down innumerable blind investment alleys. E-Z credit financed bubbles in real estate, commodities, mortgage-backed securities and a myriad of other assets. It punished saving and encouraged speculation. Imagine a man at the top of a stepladder. He is up on his toes reaching for something. Call that something "yield." Call the stepladder "leverage." Now kick the ladder away. The man falls, pieces of debt crashing to the floor around him. The Fed, watching this preventable accident unfold, rushes to the scene too late. Not only did Bernanke et al. not see it coming, but they actually egged the man higher. You will recall the ultra-low interest rates of the early 2000s. The Fed imposed them to speed recovery from an earlier accident, this one involving a man up on a stepladder reaching for technology stocks.

The underlying cause of these mishaps is the dollar and the central bank that manipulates it. In ages past, it was so simple. A central banker had one job only, and that was to assure that the currency under his care was exchangeable into gold at the lawfully stipulated rate. It was his office to make the public indifferent between currency or gold. In a crisis, the banker's job description expanded to permit emergency lending against good collateral at a high rate of interest. But no self-respecting central banker did much more. Certainly, none arrogated to himself the job of steering the economy by fixing an interest rate. None, I believe, had an economist on the payroll. None facilitated deficit spending by buying up his government's bonds. None cared about the average level of prices, which rose in wartime and sank in peacetime. It sank in peacetime because technological progress and the opening of new regions to agricultural production made merchandise and commodities cheaper and more abundant.

Not everyone agreed that these arrangements were heaven-sent. In comparison to the rigor of the gold standard, paper money seemed, to many, an intelligent and forgiving alternative. In 1878, a committee of the House of Representatives was formed to investigate the causes of the suffering of working people in the depression that was five years old and counting. Not a few witnesses pleaded for the creation of more greenbacks. They asked that the government not go through with its plan to return to the gold standard in 1879. But the nation did return to gold -- it had financed the Civil War with paper money -- and the depression ended in the very same year.

Gold is a hard master, and a capricious one, too, insofar as growth in the world's monetary base depends on the enterprise of mining engineers. But, as we have seen lately, there is no caprice like the caprice of sleep-deprived Mandarins improvising a monetary solution to a credit crisis (or, for that matter, of fully rested Mandarins setting interest rates by the lights of their econometric models).

...

Elihu Root, Republican senator from New York, thought he smelled a rat. Anticipating the credit inflations of the future and recalling the disturbances of the past, Mr. Root attacked the bill in this fashion: "Little by little, business is enlarged with easy money. With the exhaustless reservoir of the Government of the United States furnishing easy money, the sales increase, the businesses enlarge, more new enterprises are started, the spirit of optimism pervades the community.

The problem with loose money policy has several layers. The first is that it creates loose money. It allows business to borrow so easily that they take on risks they normally wouldn't. The second is that it creates prices to go up and thus limits the buying power of consumers. The third is that it weakens the currency, the Dollar.

The main problem with Chapman's analysis is that he makes an assumption he simply can't make. First, it's unclear when all of this loose money policy will actually create inflation. While this policy is clearly inflationary, the economy might be so weak that it won't necessarily cause inflation right away. Instead, prices will rise more quickly than they would have but still slowly, if at all, because the economy is so weak. Second, even if it causes inflation, that won't necessarily transfer over to housing. Just because there is generally inflation doesn't mean there will be inflation in housing specifically. It isn't as though all prices rise exactly the same during periods of inflation. The Federal Reserve created all sorts of loose monetary policy that Chapman now suggests during 2001-2003, and only housing went up. It didn't cause inflation in general just in housing. So, if it does cause inflation it won't necessarily cause inflation in housing.

Finally, causing inflation may also create the nightmare scenario. Then, we would have an economy that is still in recession at the same time we are in a period of inflation. Chapman continues to see the virtues of monetary policy but totally disregards all of its pitfalls.

A Thought Experiment on a Newspaper Bailout: Some Context on Government Intervention

In the last couple weeks, some conservative blogs here and there have suggested that the bailout would get so ridiculous that even newspapers would eventually receive a bailout.

Back in October, I joked that it wouldn’t be long before the junk-bond New York Times was lining up for a government bailout. Last month, I followed up with the launch of the Newspaper Bailout Countdown Clock in a post about Tribune Media’s financial woes.

Well, it has come to pass: Democrats have proposed a newspaper bailout in Connecticut:

Of course, there is just one problem with a newspaper bailout. That problem is the first amendment.

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

So far, each and every bailout has eventually lead to a government take over of said industry or company. That appears to be where the auto bailout is going. The government already owns Fannie Mae and Freddie Mac, and they have substantial stakes in many of the banks getting a part of the bailout. Obviously, the government couldn't take any stake in any newspaper because that would be a clear violation of the first amendment. In fact, any sort of a bailout of any media can and should be viewed as a violation of the first amendment. You never get something for nothing and so any money comes with strings. Any government money to any newspaper should be viewed immediately as the government attempting to control the flow of news.

That's why the public would never stand for any bailout of any media. That would be a clear violation of our Constitution. Yet, we stand by while the government takes over cars, banks, and mortgage giants. We would never stand by while the government took over our media because we don't want the government telling us what to think. Yet, why do we want the government telling us what cars to drive, how to bank, and how to get a mortgage? That's what has happened while the government has taken over industry after industry.

The landscape is filled with pitfalls when the government interferes in any industry. If the government takes over the media, the media becomes nothing more than a mouthpiece for the government. That's why our Constitution strictly forbids the takeover of the media by the government. Yet, when our government begins to meddle in other industries, the danger is that incompetent, naive, and arrogant politicians begin to direct businesses they have no understanding of.

So, now we are on the brink of having an auto bailout. With this bailout, we will have a car czar. What is a car czar? It's the government's automaker's CEO. Since the automakers will now be running on government money, the government will tell the automakers how to spend it. Does anyone really believe that Nancy Pelosi, Harry Reid, and whoever is the car czar have the first clue how to run a car company? If the government appointed a newspaper czar, that would violate the first amendment. Yet, a car czar is seen by most as "prudent".

Last week, I pointed out that Fannie and Freddie were manipulating mortgage rates. While I can't know for sure why this is happening, I would be willing to make a healthy wager that this came as a directive from a government bureaucrat that thought mortgage manipulation was a good idea. This is the sort of thing that happens when government runs mortgages. Imagine if a government bureaucrat put a quota on the number of stories newspapers should cover on any given topic. That would be viewed, correctly, as a violation of the first amendment. Yet, when the government manipulates another business in a similar fashion we all shake our heads and move on.

Government has enough trouble doing its own job. The last thing we need is for government to try and do everyone else's job. That's what is happening as a result of all these bailouts. The government is now also a banker, a mortgage company, and the CEO of all the automakers. There is a reason we would never stand for this in the newspaper business, and that reason has plenty of application in their current roles as well.

The Treasury's Asinine Announcement Boxes Everyone In

Starting with November 25th, the mortgage market has seen an increased in business the likes of which we haven't seen in about two years. Then, the Treasury announced that they were mulling a plan that would drop rates to 4.5%.

Lobbyists are pushing the Treasury Department to consider a plan to purchase mortgage-backed securities in the hopes of driving mortgage rates to as low as 4.5%, an industry source said.

Similar to an effort unveiled last week by the Federal Reserve, the proposal calls for Treasury to buy securities backed by 30-year fixed-rate mortgages from Fannie Mae and Freddie Mac. Details on the plan remain sketchy, but an announcement could come as early as next week, the source said.

The plan was murky and it was unclear just if the Treasury could even accomplish such a plan. Yet, such an announcement gives those looking to refinance or buy yet another reason to sit on the sidelines at the time when everyone is hoping to create more borrowing.

The problem with such an announcement is that whether or not it actually happens many borrowers and potential buyers have another reason to wait and see what the market will do. Why borrow or refinance now if in the next couple months rates will just be a full percentage point lower? The latest application numbers aren't in yet, and of course it's impossible to tell just how much business will be lost as a result. The mere mention of a plan to lower rates to 4.5% gives many people a reason to sit and wait to see if it materializes.

One thing is clear. Rates were getting better. Borrowing was starting to thaw. The mortgage business was finally seeing a light at the end of the proverbial tunnel, and then we had this announcement. Now, there is another reason for borrowers to stay on the sideline.

Such an announcement also boxes the Treasury in. If they don't follow through, it could boomerang mortgage rates in a vicious upward slide. If the Treasury were to announce their intention to table such a plan, it's likely that rates would swing upwards in the aftermath. On the other hand, it's also clear that the Treasury has no clear idea just how they will pull this off. The Treasury doesn't even know for sure how much this plan will cost.

Under the proposal being pushed by the financial industry, Treasury would seek to lower the rate on a 30-year mortgage to 4.5 percent by purchasing mortgage-backed securities from Fannie Mae and Freddie Mac. It's unclear exactly how much the plan would cost.

It's clear that this is nothing more than an idea by the Treasury. It is, as such, not the sort of thing that should have ever been leaked. It's unclear just how serious they are about this plan and yet by leaking it, they have told the market that they are serious.

It doesn't matter just how serious the Treasury is in following through with this plan the market is now demanding it. Borrowers are now more likely to wait on the sideline, and if by chance they don't follow through, the boomerang effect will be vicious. Either way, the mortgage market has just been disrupted AGAIN by a meddling government.

Some More Context on the Treasury's Plan to Drive Down Mortgage Rates

Yesterday, I analyzed the Treasury's plan to drive down mortgage rates to about 4.5%. I called it no different than any other plan for a price ceiling. Yesterday though, details were sketchy as to how the Treasury would attempt to accomplish this. Today, more details have been leaked and we should all be scared that the Treasury will actually follow through.

The head of the government's financial system rescue effort said Thursday
the Treasury Department is considering a program to encourage banks to make
mortgage loans at low rates to help revive the battered housing
market.

Under the proposal being pushed by the financial industry, Treasury would
seek to lower the rate on a 30-year mortgage to 4.5 percent by purchasing
mortgage-backed securities from Fannie Mae and Freddie Mac. It's unclear exactly
how much the plan would cost.

Asked about the proposal during his testimony before a Senate
Appropriations subcommittee, Neel Kashkari said that it was one of the options
the administration had under review.

Treasury is striving to use the
"right tools for the right job" in an effort to help as many homeowners as
possible, said Kashkari, the department official in charge of the $700 billion
rescue effort.

The goal of the industry's proposal would be to take advantage of the unusually large difference, or spread, between mortgage rates and yields on government debt. On Thursday, the yield on the 10-year Treasury note yield sank to a record low of 2.56 percent, while the national average rate on a 30-year fixed rate mortgages was 5.54 percent, according to financial publisher HSH Associates.

There are several reasons to be afraid. First, this plan is being pushed by the financial industry. Of course it is, the financial industry would be the beneficiary of such a plan. Politicians spend all campaign decrying the influence of special interests and yet this plan is the ultimate special interest give away. Second, no one at the Treasury knows just how much this is going to cost. The total value of the housing market is in excess of $10 trillion and Fannie/Freddie now account for about 80% of that. So in order to manipulate the market to reach 4.5%, the Treasury would have to spend hundreds of billions of Dollars.

Yet, it is the third part that is most troubling. The Treasury thinks they see an albatross situation because Treasury bond rates are so low, about 2.65%. The Treasury will borrow the money, they think, at 2.65% and buy bonds that will pay them in excess of 4%. If only it were that tidy. When the Treasury reaches into the Treasury money for hundreds of billions of Dollars more than they are already borrowing, on top of all of the extra borrowing they are already doing, what do you think will happen to Treasury rates? They will likely go up, way up.I've already warned about how explosive it maybe when Barack Obama asks form money for the hundreds of billions in new spending he wants. This plan will costs hundreds of billions more. Furthermore, since they will artificially drive down mortgage rates, the bonds they will hold will be worthless once their stimulus is through. As such, the Treasury will have to hold onto those bonds for the duration. This scheme won't work unless Treasury rates continue to be close to 2.65% for the duration of the period that Treasury holds onto these mortgage bonds. I have already shown that this very scheme will likely force Treasury bond rates way up. While the Treasury continues to get about 4% on their money, what will happen once the rate that Treasury bonds give goes up? Eventually, the Treasury will start to lose all sorts of money to do this.

In other words, the Treasury is willing to borrow hundreds of billions of more Dollars to take advantage of some hokey scheme that is normally reserved for quick buck artists. The Treasury was never meant to be used for this kind of market manipulation, and certainly not when it is predicated on some hokey idea like the CURRENT spread between mortgage bond rates. In fact, this particular article clearly lays out that Fannie/Freddie used a very similar scheme that wound up blowing up on them and put them into the mess they are in. In other words, the Treasury is about to attempt the same type of hokey scheme that blew up on Fannie/Freddie WITH TAXPAYER MONEY.

The problem again is that Hank Paulsen seems to forget that he is no longer an investment banker. He continues to treat everything at Treasury as though it was an investment banking deal. Playing spreads is the sort of thing an investment bank might try. That would be fine if the Treasury were an investment bank, but it isn't. Tax payer money was never supposed to be used in such a risky way. This is the worst sort of market manipulation. It's being done with tax payer money, and it's not only dangerous to our economy, but it's predicated on a very dangerous scheme.

The Bailout: The Feds Pull the Wool Over Our Eyes

The Treasury just made a stunning announcement that appears to have been met with a yawn.

Treasury Secretary Henry Paulson said Wednesday that original plan to purchase distressed mortgage assets from Wall Street firms is not the best use of the $700 billion financial rescue package, and officials will now focus on direct capital injections into the struggling financial firms.This comes after Paulson said buying troubled assets -- the plan originally advertised to the public -- would take too much time in a financial crisis that continues to test the patience of investors, government and the public.

In his statement, Paulson said that nonbank financial institutions, including companies that deal with credit cards, auto loans and student loans, may be eligible for direct capital injections. Companies such as American Express (AXP: 20.70, -1.70, -7.58%), which is one of the country's largest credit card companies, is reportedly seeking $3.5 billion in fresh capital from the government, according to The Wall Street Journal.

“I determined that the most timely, effective step to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks,” Paulson said.

Wait a minute. I thought the problem was that these institutions were all holding far too much toxic paper. I thought that if the Treasury bought this paper we could eventually sell it and maybe even at a profit. Instead, the Treasury will just give all of these folks money. This is not a loan or an investment. They are simply giving a bunch of financial institutions money. Furthermore, he has by fiat expanded the universe of companies eligible for the bailout. About a month ago, I pointed out that Hank Paulsen is now the most powerful person in the world. Talk about power, he has now decided to spend about $700 billion not as it was intended, but as he intends.

The taxpayers have been swindled. First, we were forced into this bailout at the end of the proverbial financial gun. Now, the bailout has been reorganized in a manner that we weren't told about by one person. Apparently, there is nothing anyone can do about this.