The Scam: The Fed Is Selling Good MBS Loans To Bankers And Keeping The Poor Quality Ones

Total MBS on the Fed’s balance sheet fell by $15.2 billion last week, bringing the drop to $29 billion over the past 3 weeks.

Between July 14, when the first paydowns hit, and November 3, MBS paydowns totaled $111 billion, equivalent to a monthly rate of $24.6 billion.

The pattern of prepayments has been uneven, with none some weeks, and big chunks in others. With higher mortgage rates in recent weeks, the prepayments should soon slow dramatically as refi (refinance) volume shrivels.

While all of these better quality loans were getting paid off from the balance sheet of the Fed, where do you think those refi’d loans were going?

Answer- to the banksters. We know the loans are better quality because the borrowers could refi them. (In order to refinance, the loans must have plenty of equity, and thus there must be a good spread for the lender – because the borrowers had more than adequate income and credit ratings; these were loans that were unlikely to default.)

The loans that cannot be refinanced, that is, those of lower quality, on the other hand, will stay on the Fed’s balance sheet and become a proportionally bigger piece of the Fed’s assets.

As if acknowledging the obvious conflict of interest, the Fed tried to rectify the problem by buying “high quality” Treasury paper. Hence we got QE2, aka monetization, in spite of Bernanke’s (Burntwankie’s) painful denials last night on 60 Minutes. The more Ben lied, the more his facial twitch acted up. But that’s another story.

Now, as the QE2 cash reaches the banks via Primary Dealer checking accounts, the banks have taken the opportunity to lend it out by originating mortgages with these good borrowers.

They will then package the new loans and sell them to Fannie, Freddie, and the FHLB, otherwise known as the Flub.

From there, the banks will use the cash from selling the loans to Fannie, Freddie, or Flub, and they buy the new Fannie and Freddie MBS, which Fannie, Freddie and the Flub just made from the good loans which the bank just bankrolled with Bernanke’s (Liar Ben’s) freshly electronically created (but not printed) cash.

So the banks now get the loans back in their portfolios, except that now they come with a government guarantee, courtesy of the fact that Fannie, Freddie, and the Flub are government agencies, and actually government owned. The banks almost instantly went from at risk lender, to a holder of government guaranteed paper on the very same loans they just made.

Thus the circle is jerked. The banks made good loans with money from the Fed, and with loans that they pulled off the Fed’s balance sheet. Plus, they got a government guarantee on top of it. Meanwhile the Fed is left with just poor quality loans. It’s a perfect scam.

You don’t believe me? Take a look at this chart and see for yourself.

adler chart

Photo: Lee Adler, The Wall Street Examiner

Since July 14 through December 1, the Fed has been prepaid on $111 billion of good quality MBS. All of a sudden, in July, the banks started adding Agency MBS like gangbusters. Since the week before July 11 through November 24 the banks have added, oh say, can you see, $111 billion of Agency MBS. I feel so damned patriotic, I could just burst with pride.

At least I can see what drives people to conspiracy theories. I think I’ll join the movement. This is too much. You have a conspiracy theory? Count me in! I’m mad as hell, and I’m not going to take this any more!

What puts the icing on the cake is that as home values continue to fall, many of these loans will turn from good to bad as well. Loans made in July are already closing in on wiping out the equity in some cases. Bank balance sheets will hardly be better off. Well, they will be, because these loans carry those government guarantees.

So the banksters will be able to collect another few years of massive bonuses as all of the Fed’s scams lead inevitably to systemic degradation and failure. And because of those guarantees that the Federal Government intimates it will stand behind, the taxpayer– you and I, will be on the hook for not only the bad loans already on the Fed’s balance sheet, and the old bad loans on the banks’ balance sheets that haven’t been marked down yet, but these new ones that go bad on the banks’ balance sheets as well.

Now that’s what I call a racket.
This is an excerpt from the Wall Street Examiner Professional Edition Fed Report, a weekly report covering the machinations of the Fed, Treasury, and foreign central banks in the US market. Try it risk free for 30 days

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