Sunday, October 19, 2008

Granpa's Political Corner: How did we get here? Are we there yet?

Before we try to figure out how we got here there are some elements that need to be considered, perhaps understood.

REPUBLIC - A state in which the supreme power rests in the body of citizens entitled to vote and is exercised by representatives chosen directly or indirectly by them.

DEMOCRACY - Government by the people. A form of government in which the supreme power is vested in the people and exercised directly by them or by their elected agents under a free electoral system.

TRADITIONAL MORTGAGE - Mortgage lenders interviewed applicants, evaluated their credirtworthiness, issued (loaned money) and held (on the issuer's balance sheet) mortgages, collected the monthly payments, managed defaults and foreclosures.

MORTGAGE-PASS THROUGH - This instrument is created by bundling a group of mortgages and transferring them to a trust. The trust issues certificates representing a pro rata slice of all the principle and interest it receives.

COLLATERALIZED MORTGAGE OBLIGATION (CMO) - Invented in 1983 by Larry Fink and a First Boston team on behalf of Freddie Mac. Mortgages are transferred to a trust. The trust then sliced (tranched, separated) these into three segments, each segment having its own safety rating. The trust then issued separate bonds for each segment. The top-tier segment, typically with mortgages having a Triple-A super safe rating, bonds had first claim on ALL cash flows and paid commensurately low yields. The second tier contained mortgages with more risk but had a somewhat higher yield. The third tier contained mortgages at risk of defaulting and was the first to absorb ALL losses, however, it also absorbed all the yield savings from the two top-tier bonds and could pay attractive junk-bond-type yields.

CREDIT DEFAULT SWAPS - (CDS) They are insurance issued to cover bonds. Bond owners buy an insurance policy (swap) to protect themselves in case the bond issuer can't pay its debt (obligation). Financial institutions can insure a bond even if they don't own it. This kind of speculation has pushed the value of outstanding insurance on the mortgage bonds (CDS) to $58 trillion (note - TRILLION).

COVERED MORTGAGE BONDS - The bonds are to be issued by the holder of the mortgage (the lender). The bonds pay a fixed rate of interest to the bond purchaser (bond holder) and are backed by the cash flow from the pool of home mortages and by the full faith and credit of the bond issuer. If a mortgage in the pool goes bad the bond issuer must replace it with a "better" one. The loans in the pool remain on the issuer's (bank, etc.) balance sheet. If a bank becomes insolvent for whatever reason, owners of the covered bonds stand at the front of the line for payment. The Federal Deposit Insurance Company (FDIC) must pay off the bond holders in full even if it means there will not be enough money left to pay insured depositors. In the event that the FDIC runs out of money they turn to the government (taxpayers) to pay the bill. At the end of 2007, at the then-current exchange rate, there were $1.7 trillion outstanding mortgage-covered bonds in Europe. (data: European Covered Bond Council, BW).

Businessweek, August11,2008. "Covered Bonds, Exposed Taxpayers, by Peter Coy. "Treasury Secretary Henry M. Paulson, Jr. is promoting covered bonds, a mortgage financing vehicle popular in Europe, as a safer way to raise money for home buying in the U.S.".

Until 1913 the U.S. had defeated all attempts to establish a National (Central) bank to control our money. On December 23, 1913, the Federal Until 1913 the U.S. had defeated all attempts to establish a National (Reserve Act (Glass-Owen Bill) was passed by Congress and signed into law one hour after being passed.

The Federal Reserve System is an independent central bank, not a part of the federal government. The legislation granted total power over the monitary policies of all US Banks and the decisions of the Fed do not have to be ratified by the President, or anyone else in the executive or legislative branches. The 1913 law, SEC 30, "The right to amend, alter, or repeal this Act is hereby expressly reserved". Interestingly, no further clarification is given.

Sec. 341 Second. To have succession for a period of twenty years from its organization unless dissolved by an Act of Congress, or unless its franchise becomes forfeited by some violation of law. The corporate life expired in 1933 when F. D. Roosevelt was President. Was the Fed ever terminated or for that matter renewed?

No Senator or Representative in Congress shall be a member of the Federal Reserve Board or an officer or a director of a Federal reserve bank. 12 Federal Reserve banks, including the capital stock and surplus therein, and the Income derived therefrom shall be exempt from Federal, State, and local taxation, except taxes upon real estate.

Ever wonder who owns the Federal Reserve System? Ever wonder about Alan Greenspan being knighted by the Queen of England in September of 2002?

A 1976 government study was commissioned by the Federal Reserve Directors. ( "Chart 1 Source: Federal Reserve Directors: A Study of Corporate and Banking Influence -- Published 1976 Chart 1 reveals the linear connection between the Rothsc hilds and the Bank of England, and the London banking houses which ultimately control the Federal Reserve Banks through their stockholdings of bank stock and their subsidiary firms in New York. The two principal Rothschild representatives in New York, J.P. Morgan Co., and Kuhn, Loeb & Co. were the firms which set up the Jekyll Island C onference at which the Federal Redserve Act was drafted, who directed the subsequent suc- cessful campaign to have the plan enacted into law by Congress, and who purchased the controlling amounts of stock in the Federal Reserve Bank of New York in 1914. These firms had their principal officers ap pointed to the d Federal Reserve Board of Governors and the Federal Advisory Council in 1914. In 1914 a few families (blood or business related) owning controlling stock in existing banks (such as New York City) caused those banks to purchase controlling shares in the Federal Reserve regional banks. Examination of the charts and text in the House Banking Committee Staff Report of August. 1976 and the current stockholders list of thed 12 regional Federal Reserve Banks show this same family control."

We had the stock market crash of 1929 and the ensuing depression years. Homebuilding, amoung others, experienced a severe decline. Mortgages were of short duration and banks, short of cash, did not offer refinancing and when the mortgage became due often asked for payment in full, which was difficult if not impossible manage.

Thinking to offer help the federal government created the Federal Housing Administration (FHA) in 1934. Frankllin Delano Roosevelt was president. The FHA guaranteed mortgages against default, removing the risk from the bank. THIS WAS THE FIRST MAJOR GOVERNMENTAL INTRUSION IN THE MORTGAGE MARKET.

The Federal National Mortgage Corporation (FNMA) (Fannie Mae) was founded as a government agency in 1938 as part of FDR's New Deal. Fannie Mae does not make home loans (issue mortgages) directly to consumers but functions as a leading participant in the U.S. SECONDARY mortgage market. By purchasing and securitizing mortgages, Fannie Mae facilitates liquidity in the PRIMARY mortgage market by ensuring that funds are consistently available to the institutions that do lend money to home buyers. In 1968 Fannie Mae became a stockholder-owned corporation chartered by congress.

The Federal Home Loan Mortgage Corporation (FHLMC) (Freddy Mac) is a government sponsored enterprise of the federal government created in 1970 to expand the secondary market for mortgages in the U.S. Freddie Mac buys mortgages in the secondary market, pools them, and sells them as mortgage -backed securities to investors.

The Social Security Act of 1965 resulted in the passing of two bills: Medicare and Medicaid. Signed by Lyndon B. Johnson (LBJ) as part of LBJ's Great Society.

The Home Mortgage Disclosure Act (HMDA) was enacted by congress in 1974 and implemented by the Federal Reserve Board as Regulation C. This required that mortgage lenders provide detailed information about mortgage applications.

The Community Reinvestment Act (CRA), signed by Jimmy Carter in 1977, was designed to encourage commercial banks and savings associations to meet the need of borrowers in all segments of their communities, including low- and moderate- income neighborhoods. The intention was to reduce "discriminatory" credit practices against neighborhoods, "redlining". To enforce the stature, federal regulatory agencies examine banking institutions of CRA compliance, and take this information into consideration when approving applications for new bank branches, for mergers or acquisitions. (Sounds like comply with your federal government or else doesn't it?)

In 1992 The Boston Fed, after a seemingly careful statistical analysis which proported to demonstrate that - even after controlling for important variables associated with creditworthiness - minorities were denied mortgages at higher rates than whites. A new manual appeared from the Boston Fed. It outlined new standards. "Management should be directed to review existing underwriting standards and practices to ensure that they are valid predictors of risk. Special care should be taken to ensure that standards are appropriate to the economic culture of urban, lower-income, and nontraditional consumers." Never mind that financial standards that indicate a high probability of success in meeting mortgage payments (steady employment, a down payment, savings, a loan payment small relative to income) would be prudent standards for borrowers of all incomes and all races.

If you have been able to wade through this stuff you might have noticed a steady intrusion of the federal government accompanied by a steady decline in responsibility for the actions of individuals. It seems to me that the lack of responsibility of mortgage lenders and the intrusion of the federal government into the banking system is largely the basic cause of much of our problems. The steady trend to more socialism throughout our society tends to promote more federal government intrusion. We have become much too permissive with multiculturism and diversity being praised but with the resultant deterioration in our own culture and nationality. One needs to consider the standards of our political system. We have entered into "free trade" and "security and prosperity partnerships". We have a tax structure that needs to be rethought. We have managed to allow our corporations to move operations "off shore" to our detriment. These things and more have to be considered in evaluating our economic status, for they are all intertwined.

We have spent over $2 trillion in "managing" this economic mess this year. Our federal budget this year is over $12 trillion and we owe or have obligations over $53 trillion. Give this some thought when you vote. How much more spending and socialism do you want?

Granpa Graham

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