Here’s the latest in the FHA’s ongoing parade of horrors.
Now they’re subsidizing hedge fund profits.
As the NYT reports, hedge funds are buying up big pools of distressed mortgages, modifying the loans with the homeowners, and then wrapping them in FHA insurance, so they can flip them for a higher price.
For instance, a fund might offer to pay $40 million for a $100 million block of mortgages from a bank in distress. Then the fund could arrange to have some of those loans refinanced into mortgages backed by an agency like the F.H.A and then sold to an agency like Ginnie Mae. The trick is to persuade the homeowners to refinance those mortgages, by offering to reduce the amounts the homeowners owe.
The profit comes when the refinancings reach more than the $40 million that the fund paid for the block of loans.
So it’s good for the homeowner, and great for the hedge fund, but the taxpayer bears the burden. Why?
We suppose you could think of the hedge fund as merely a service provider in this case — and certainly finding proper loans to modify and doing so costs money. There’s the risk that they won’t be able to modify and get FHA insurance on enough of the loans to make a profit.
But however you boil it down, it’s still a case of the public taking a risk, and the private sector collecting a profit.
But then, how’s that new at all?