The only reason the Fed isn't talking about this I believe is they don't want Trump to shut them down completely like he threatened to do during the campaign. So, Trump is preventing the Fed from doing their job via blackmail of him potentially shutting them down if they do their job. Sort of like the harm he has already done to all the cabinet positions by who he has nominated especially in the EPA which sounds like it is completely dysfunctional already.
So, are we headed into a new subprime mortgage crisis? maybe. My wife thinks it might take 2 years before we have a mortgage crisis causing a Great Recession or a Great Depression worldwide caused by everything Trump is doing so far.
So, if you are middle Class or poor just expect Trump to steal your home (if you have an adjustable rate loan)and to also steal your health insurance during the next few years.
So, if he doesn't kill by stealing your health insurance he will likely bankrupt you instead (if you are middle Class or poor.) by stealing your home (if it has an adjustable rate mortgage).
Another subprime mortgage crisis may be looming
Are we heading toward another subprime mortgage crisis?
Story highlights
- William Poole: Nine years ago an oblivious Fed had to bail out Bear Stearns, which had invested in risky mortgages
- Poole says there are again signs that subprime mortgages are a problem and the Fed isn't paying enough attention
William Poole is senior fellow at the Cato Institute and distinguished scholar in residence at the University of Delaware. He retired as president and CEO of the Federal Reserve Bank of St. Louis in March 2008. The opinions expressed in this commentary are his own.
(CNN)The
Federal Reserve bailed out Bear Stearns on March 14, nine years ago.
What has the Fed learned from that mistake? Not enough, perhaps.
William Poole
A
little understood part of the Bear story is that in March 2008, the
Federal Open Market Committee, or FOMC, ignored critical facts
concerning Fannie Mae and Freddie Mac. Unfortunately, the Fed may be
making the exact same mistake today.
Bear's
problems came from excessive investment in bonds based on subprime
mortgages, which carry greater risk for one or more reasons, such as the
borrower's poor credit rating. Fannie and Freddie were the principal
housing lenders, having been organized as "Government Sponsored
Enterprises" or "GSEs," and they were responsible for the creation of
much of the subprime mortgages.
Yet
the FOMC transcripts and the staff materials prepared in March 2008
suggest that no one in the Fed bothered to read the GSE's 2007 annual
reports, released February 28, 2008. In the FOMC conference call meeting
March 10, there is mention of Fannie/Freddie in the context of declines
in their stock prices, but no mention of important disclosures revealed
in their annual reports.
And
those reports showed that Fannie and Freddie were both essentially
insolvent at the end of 2007, at the business-cycle peak before the
recession had really started. These two companies had obligations
outstanding almost as large as the total Treasury debt outstanding, far
larger than Bear Stearns and Lehman Brothers combined.
The
possibility that households would cut consumption of goods and services
as they attempted to meet subprime mortgage payments -- touching off a
deep recession -- was never mentioned in the FOMC meetings surrounding
Bear. Thus, failing to pay attention to the poor condition of the Fannie
and Freddie mortgage loans was a Fed mistake that compounded the
mistake of bailing out Bear Stearns.
Today,
the Fed is again ignoring the GSEs and their potential contribution to
future instability. According to Freddie's 2016 annual report,
"Expanding access to affordable mortgage credit will continue to be a
top priority in 2017." Fannie/Freddie have redefined "subprime" to a
credit rating of below 620; previously, these firms and banking
regulators had used 660 as the dividing line that defined a subprime
borrower. Now by using the lower number, they may be buying even weaker
mortgages than before the financial crisis.
The
GSEs are wrapping new sub-subprime mortgages into the mortgage-backed
securities they sell to the market. Fannie and Freddie guarantee these
securities, and because the federal government stands behind the GSEs,
there is little market discipline. Think about that: With regard to
subprime mortgages we may now be in worse shape than we were before the
crisis.
In
the crisis, the Fed was overwhelmed by events because it was not paying
adequate attention to subprime debt and had no contingency plans.
Timothy Geithner, president of the New York Fed at the beginning of the
crisis and then secretary of treasury, was one of the financial crisis
managers. He explained Fed policy with great clarity in
his 2014 book, "Stress Test:" "... We were lurching all over the place,
and no one had any idea what to expect next. Hank [Paulson] said he
wouldn't need to inject capital into Fannie and Freddie, then did what
had to be done and injected $200 billion. Collectively, we helped
prevent Bear's failure, then seemed to suggest we let Lehman fail on
purpose, then turned around and saved AIG from collapse. ... Our
unpredictability undermined the effectiveness of our response."
Where
are we today? Few observers believe the Fed has a clearly articulated
strategy on its adjusting the fed funds rate, which is likely to be the
subject of its announcement at the end of its meeting tomorrow. That
rate is its principal policy tool determining the degree of monetary
policy stimulus. Equally important, how and when will the Fed deal with
its bloated portfolio? Over recent years, the Fed accumulated a massive
number of Treasury and Fannie/Freddie bonds that it cannot retain
indefinitely without creating a huge risk of future inflation.
Alan
Greenspan had dissociated the Fed from supporting the GSEs to the
maximum possible extent. Now, with its huge portfolio of mortgage-backed
securities issued by Fannie and Freddie, the Fed gives aid and comfort
to the affordable housing lobby that created the subprime mortgage mess
and the financial crisis.
In
Freddie's 2016 Annual Report, the agency says 36% of its obligations are
"credit enhanced," meaning they carry mortgage insurance of one sort or
another, which is typically used for weaker mortgages. The insurance
against default is only as good as the enhancing firms, and none is
rated above BBB+. If these weak subprime mortgages begin to fail in
large numbers, so also will the insuring companies.
There
is one critical difference between today's situation and that of 2008:
There is very little private capital that would be at risk if there's
another subprime mortgage bust. Before the crisis, there was some market
discipline, however imperfect it was, because potential buyers of
mortgages would look at their quality carefully. Now only Fannie and
Freddie are examining the quality of the mortgages. And it is taxpayers
who would carry the burden of bailing out Fannie and Freddie, since
their obligations are guaranteed by the US government.
According
to the Fannie/Freddie annual reports for 2016, it is surely the case
that subprime mortgage issuance is one force driving house prices once
again — up by about 30% over the past four years and now about back to the elevated peak in 2006.
Will subprime debt begin to fail again when house prices level off?
Why isn't the Fed talking about this matter? Someone please convince me that "this time is different."
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