Posted on 05/07/2008 12:43:29 AM PDT by bruinbirdman
The subprime crisis still dominates headlines as banks and financial institutions continue their multibillion-dollar writedowns and shoring up of depleted balance sheets with massive infusions of new capital. But is the biggest entity of all--the U.S. government--heading toward the financial rocks? Moody's, the credit-rating agency, got publicity--for once, not negative--in January when it warned that the U.S. government may lose its triple-A rating within a decade if Uncle Sam doesn't do something drastic about the unfunded liabilities of Social Security, Medicare and Medicaid. Let's put aside the sorry record of Moody's and its brethren in inaccurately assessing the creditworthiness of all those packages of subprime mortgages and other exotic instruments. And let's ignore the fact that the U.S. government can literally print the money to service Washington's Treasury debt--after all, in the inflationary 1970s the real value of a U.S. Treasury bond plummeted and Washington's top-notch credit rating was unaffected. Moody's is right to warn that U.S. entitlement programs (not to mention those of Europe and Japan) need drastic reform.
Contrary to the doomsayers, however, systemic change need not involve big cuts in benefits or draconian increases in taxes. In fact, hiking the current levy on payrolls to shore up Social Security and Medicare would have the perverse effect of weakening the economy by raising the cost of labor and reducing the rewards of productive work. Japan has been on a similar track--periodically raising taxes to save the national pension system--which has contributed to the virtual stagnation of its economy since the late 1980s.
In fact, income and capital gains tax rates should be reduced. The resulting bigger, wealthier economy would make it infinitely easier to pay future retirement benefits. . . .
(Excerpt) Read more at forbes.com ...
That's right, I said irresponsible borrowers.
“reducing the rewards of productive work”
The housing bubble began as the rewards of productive work (wages and resultant takehome pay)were recognized as inadequate for purchase of a home on traditional mortgage terms. All standards were relaxed extremely or erased altogether resulting in a housing boom that has gone bust nationally and deeply. It is not unlikely that the ‘bottom’ of the housing equity decline will not be reached until 2012, and, thereafter, move laterally for a number of years. Wages are going to fall further during this time interval. Homes cannot be purchased sensibly by the middle class again until 1) the achievable monthly rental value of a home matches and surpasses, at least slightly, the monthly overhead of maintaing the home (maintenance, taxes, insurance,etc) and, 2) a buyers wages supporting the price of the mortgage. Housing values must drop a huge amount before the above conditions can be met by a buyer with good probability of paying off the mortgage. WAGES MUST RISE TO AN ADEQUATE LEVEL for this to happen, and house values must fall until the two come together in financial marriage. It will not be safe to buy until there is a confirmed housing ‘uptick’ ....that is years away.
Forbes presumes, even with his common sense remedy, that the dollar will not be worth half or less than it is worth today for SS and Medicare benefits to be of any significant value. The US is, in my opinion, not AAA now, much less waiting for ten years to find out...the US, the biggest debtor nation in history, must borrow approx 70 billion a month to run its enterprise...taxpayers cannot fill this gap now. More than a few analysts think the Dollar Index will be fortunate to settle at .52 in the not too far future. Forbes has made a thoughtful, constructive, well stated suggestion...if I was the judge in the movie, ‘My Cousin Vinnie’ I would reply to Forbes..”Suggestion (motion) denied”. The tens of trillions represented by SS and Medicare are but a fraction of the credit derivative swaps which have questionable counterparty ‘insurance’ support and, which threaten our financial system. After all, W. Buffet famously defined credit derivatives ‘weapons of mass financial destruction’ some years ago...he is being proved correct. I think Forbes is thinking right on target but omitting the full scope of the daunting problems facing the US which have been brought about by its own policies, and which are being commented on daily in our financial world increasingly and in more detail.
There is no elected official in Washington with the spine to fix this because of our spoiled and irresponsible electorate, never mind the mental capacity to think beyond the next poll. Certainly neither BHO or McC is up to the task. So - hang on for a really rough ride - it’s going to be like a knife fight in a phone booth. Until we as a nation stop treating elections like high school popularity contests, things are just going to get worse.
Well said.
"Citibank Offering Illegal Aliens Mortgages With Below Market Interest Rates, Down Payment Assistance And No Mortgage Insurance Requirements"
http://www.diggersrealm.com/mt/archives/001610.html
"Wells Fargo Begins Openly Giving Illegal Aliens Home Loans In California"
http://www.diggersrealm.com/mt/archives/001529.html
"Banking on illegal immigrants... Banks are seeing an untapped resource in providing home loans to undocumented U.S. residents"
......"Bill Schumer, vice president of product development at Fifth Third Mortgage Co., a unit of Fifth Third Bancorp. (Research), said the company entered the marketplace due to the belief that providing these low-to-moderate income loans will help revitalize communities in the United States, as borrowers buy more run-down properties and rebuild.
He added that by introducing this segment of the population to home ownership education, they are also building a foundation to cross-sell their other products.
"We've been at this program for the last 8 or 9 months and 68 percent of these borrowers have established three or more banking services with us," he said.
While Schumer wasn't willing to disclose how many of mortgages the company provides, he said the product has been well received in the marketplace and is already 4 percent above the level the bank had targeted for the year. And it's growing.
That's not surprising, said Alenka Grealish, manager of the banking group at Celent, an independent research and consulting firm.
Grealish said while the mortgage banking business in the U.S. continues to be red hot, veterans know that it's a highly cyclical industry that moves with interest rate trends. She said that forward-looking banks are already considering how to grow their business when the pipeline of traditional mortgages begins to dry up.
"Illegal immigrants are here to stay and banks are recognizing that," she said. "If you do a niche market well and know how to price it, banks can have some attractive margins."
She added that while criticism is rampant, banks are careful to follow guidelines that the government already has in place.
Case in point: the government's issuance of individual taxpayer identification numbers, or ITINs.
ITINs are a nine-digit tax processing number issued by the Internal Revenue Service to individuals who are required to have a U.S. taxpayer identification number but who don't have, and aren't eligible to obtain, a social security number. Since the IRS doesn't require legal residency to obtain an ITIN, many illegal immigrants use this form of identification to pay U.S. taxes and buy homes.
"Illegal immigrants are a huge gray area and it becomes even more gray when you start issuing ITINs," Grealish said. "There's complicity already within the government in which they're saying that they're kind of fine with these people here as long as they pay their taxes."
The IRS for its part says that ITINs aren't valid for identification purposes outside of the tax system. But there are no explicit rules banning the use of ITINs in obtaining mortgages.
Banco Popular's Peterson added that it would be discriminatory to deny a loan based on an ITIN.
For now, community banks are leading the charge when it comes to providing home loans for illegal immigrants. Banking experts say that community banks often have the bilingual capabilities and are more in tune with local community needs and markets.
And larger banks are holding out for secondary markets such as Fannie Mae or Freddie Mac to agree to buy illegal immigrant mortgages from the banks – thus lowering their risk.
Bank of America (Research), which accepts ITINs to open interest-bearing deposit accounts, currently isn't offering a mortgage product to this market but the banking giant is looking into it, said spokeswoman Julie Davis.
"Banks are counting on the fact that we do a lousy job with interior enforcement," said Celent's Grealish. "Once you're in the country and you haven't done anything wrong, the chances of being deported are very slim. Banks are banking on that."
http://money.cnn.com/2005/08/08/news/economy/illegal_immigrants/
"the daunting problems facing the US which have been brought about by its own policies, and which are being commented on daily in our financial world increasingly and in more detail."
Aside from their affect in depressing wages and draining Federal benefits, what hasn't been said and seems to be being obviously overlooked is accounting for the exact number of subprime loans given specifically to illegal aliens and what impact having done so is having on the housing crisis.
That doesn't work with irresponsible borrowers. They will still borrow if someone is still willing to lend..
Bismarck dollar ping
And they have no longer to wait as congress virtually nationalized home mortgages with Fannie Mae.
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