Paulson's Quick Draw

By Peter Schiff – President, EuroPacific Capital

 

Treasury Secretary Henry Paulson, the man who said that subprime was contained and that the Bazooka in his pocket would never be used, now assures us that the bailout of Fannie Mae and Freddie Mac will be costless to taxpayers. Despite the near euphoria that the plan has sparked on Wall Street, the move will go down in history as the biggest policy blunder of all time, and will be credited as a pivotal point in the financial collapse of the American economy. The ultimate cost to Unites States citizens will be in the range of hundreds of billions of dollars, perhaps more.

 

The original idea that gave birth to Freddie and Fannie, which is to make housing more affordable to average Americans, should now be seen as farcical. Their new goal is to keep housing prices high. Absent Freddie and Fannie, housing prices would fall sharply and the mortgage market would stabilize. Americans would once again be able to buy affordable houses with mortgages they could actually repay –just like their grandparents did. Instead they will keep overpaying for houses, burdening themselves with excessive payments in the process, and ultimately sticking taxpayers with the bills when they default.

 

In contrast to Paulson’s continuous misreading of the market, I have consistently predicted the failure of Freddie and Fannie. I did so in my book Crash Proof, and in numerous speeches, commentaries and television appearances. I also was quick to point out that Paulson’s Bazooka would not remain holstered for long.

 

There is absolutely no substance to Paulson’s insistence that based on the government’s first claim on the future profits of Fannie and Freddie, the plan offers protection for taxpayers. There will be no future profits, just more heavy losses. Americans will now have unlimited ability to continue to overpay for houses and commit to mortgages they can’t afford. In fact, the plan insures that eventual public sector losses will vastly exceed those that would have befallen the private sector in a free-market resolution.

 

Paulson claims that his goal is to stabilize the mortgage market. But the best way to do so would be to allow housing prices to fall to a market clearing level. As long as home prices remain artificially high, the risks of mortgage lending will keep credit tight, and the high costs of mortgage payments will keep potential buyers on the side-lines. With private lenders justly cautious, the government intends to hold open the lending spigots, without the pesky concerns over losses or financial risk. The hope is that the new lending will prevent home prices from falling further. It won’t work. The government “solution” will simply delay the fall of artificially high home valuations and temporarily preserve the illusion of prosperity.  (Until the election/inauguration –Voltron)

 

In order to preserve current home prices, the government will be forced to maintain the lax lending standards that got us into this mess in the first place. Since all the losses will now be borne by taxpayers, those lax standards will be much more problematic. The moral hazard that existed prior to this bailout has become that much more hazardous. Every mortgage now insured by Fannie and Freddie is the equivalent of a U.S. Treasury bond. This allows anyone to borrow on the full faith and credit of the U.S. government so long has the money is used to buy a house. In addition, mortgage lending will now be a government function, run with Post Office-like efficiency.

 

Of course the biggest collateral damage caused by Paulson’s bazooka is the large hole ripped through the already tattered U.S. Constitution. If the government can do this, does anyone believe there is anything it can not do? In effect the Federal government now has absolute power to corrupt absolutely.

 

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.”

Out of Lehman

Voltron says: Lehman finally cracked $12 today.  Then $11, then $10, then $9 and is now trading with an 8 handle.  I’ve covered my short position.

 

http://biz.yahoo.com/zacks/080909/14625.html

Treasuries down

From the July 17th issue of “The Economist

 

“Nationalization . . . would bring the whole of Fannie’s and Freddie’s debt onto the federal government’s balance sheet. In terms of book-keeping this would almost double the public debt, but that is rather misleading. It would hardly be like issuing $5.2 trillion of new Treasury bonds, because Fannie’s and Freddie’s debt is backed by real assets. Nevertheless, the fear [is] that the taxpayer may have to absorb the GSEs’ debt . . . . That suggests yet another irony; the debt of the GSEs has been trading as if it were guaranteed by the American government, but the debt of the government was not trading as if Uncle Sam had guaranteed that of the GSEs.”

 

Voltron says: This irony (or paradox) has been resolved:  the GSE debt was priced correctly and government debt was priced incorrectly.  The government’s intent in bailing out the GSEs was to raise the value of GSE debt (decrease borrowing costs) but since that proves that government debt was mispriced; it is government debt prices that will adjust.  In fact, this has started happening already.  The Treasury’s actions will do nothing to fix the housing bust.  It will just make the budget deficit worse.  It will collapse the dollar and cause inflation.  It will drive banks holding GSE equity into the arms of the woefully undercapitalized FDIC.  If fannie and Freddie couldn’t make money with all of their “implicit guarantees” and tax advantages and everything else . . . how are regular banks supposedly profitable?  Of course there’s optimism in the market that the Fed and Treasury Dept are taking decisive action, but the fact that they are doing it now is evidence that the problem is much much worse than they were previously willing to admit.  The government is bent on doubling down again and again until the election/inauguration.

 

More background and analysis here.

CDS supernova coming

 

Voltron says:  it’s official: credit default swaps on Fannie and Freddie are being triggered (link)

 

What next?

Voltron says: The collapse and bailout of Fannie and Freddie is possibly bigger than then Enron and every other accounting scandal combined. So what does this mean to my forecast? Well, we now have a very large, important and irrational player in the game – the government. There is a fascinating power struggle between Washington and Wall Street. Politicians get big donations from Wall Street (including Fannie and Freddie to the tune of $186 million), but politicians are resentful of Wall Street’s conspicuous wealth and the power it can buy. Now Wall Street has finally overleveraged and painted themselves into a corner. They are calling in all of their favors, but they are so beaten up this time that Washington can pull the rug from under them. Bill Gross, PIMCO’s top bond fund manager has bet heavily on a Fannie/Freddie bailout (link) and on Friday he said that if he doesn’t get one, he’ll take his ball and go home (link). The government can do anything from nothing, to a complete - throw moral hazard to the wind - socialize the losses bailout of everyone at taxpayer expense, to total nationalization of the banking system. I’m not sure which way they are going to go, but in any case it’s not good for the US dollar.

Keep an eye on Lehman

Voltron says: Lehman is trying to split into a “good bank” and a “bad bank” (link). If that sounds a bit fishy, that’s because it is. It’s fraudulent conveyance and it’s illegal. Of course, that won’t stop Lehman from doing it because after all their CEO is on the board of the Federal Reserve Bank of New York. If that happens the shareholders will be issued share is in the good bank and the bad bank. Most people will dump the shares of the bad bank and the stock will plummet. Shares in the good bank will most likely rise. If that happens and you are short Lehman (like me) you will be short shares of good Lehman and bad Lehman. If you cover both, you may initially take a loss because after all, Lehman is doing this to increase the overall value (hoping the whole is worth less than the sum of its parts). The trick is to cover the bad Lehman when it plummets and stay short the “good Lehman” until people figure out the scam and it goes down too.

Also the rats have been jumping ship (link, link) which makes selling off parts of the firm less likely.

Fannie and Freddie bailout official

Voltron says:  According to the New York Times (article linked from my previous post) Fannie and Freddie were Phoney and Fraudy.  What the government hired forensic auditors and bankers have uncovered so far is that they were keeping tax losses on their books as “assets” even though there was no reasonable expectation of taxable income to use them to offset in the near future and while most banks start writing off a mortgage if it’s 90 days late, F&F WAITED TWO YEARS!  And they need to refinance $223 billion is short term debt in the next few weeks.

 

Here’s what we know: http://www.forbes.com/2008/09/07/fannie-freddie-bailout-biz-cx_lm_0907mortgage.html

 

Commercial Banks hold preferred stocks in F&F because the FDIC considers it as good as cash and there are tax advantages.  It is unclear if the deferred dividend payments on the preferred stocks will send commercial banks into the arms of the undercapitalized FDIC (link).  It is also unclear if it will trigger an apocalyptic chain reaction of credit default swaps (link) like what nearly brought down the financial system when Bear Stearns went under.

 

Here’s some indignation courtesy of the colorful Mr. Mortgage: http://mrmortgage.ml-implode.com/2008/09/07/fanniefreddie-massive-fraud-breakdown/

NYT: Why fannie and freddie are getting bailed out NOW

http://www.nytimes.com/2008/09/07/business/07fannie.html?_r=1&pagewanted=print

Fannie and Freddie Bailout

Voltron says: There is some kind of bailout of Fannie Mae and Freddie Mac that will be announced on Sunday. Rumors abound. At question is to what extent the stock holders, the preferred stock holders and bond holders will take a loss. Fannie and Freddie financed $5 trillion in mortgages. That's half of the mortgages in the U.S. and comparable in size to the national debt. F&F are not government agencies, but the people treated them as if they were. As a result they were able to borrow money very cheaply, and people were willing to lend to them because they got paid a little bit more than if they loaned money to the government. As private profit seeking companies accountable only to the shareholders, they acted rationally; they made as many stupidly risky loans as they could as quickly as they could to make as much money as possible in the shortest amount of time. They were also embroiled in accounting scandals and their accounting is still a mess and nobody knows what lurks in their $5 trillion portfolios of exotic financial instruments. When I say nobody I mean NOBODY, including themselves. They eventually became "too big to fail." Much of that debt is owned by foreign governments which whom we have a trade deficit, such as China and Japan. They (wrongly) view the debt as U.S. government debt and it would be a diplomatic disaster if F&F defaulted. Many banks own the preferred stock because the dividends has special tax treatment (thanks again, government). There are also trillions of dollars in credit default swaps - i.e., insurance on F&F debt that will trigger a massive cascade of bankruptcies if F&F ever defaults. So here we are. I'll post the details and my analysis when they are announced. In the meantime, enjoy Treasury Secretary Paulson getting schooled by Sen Jim Bunning (R-Kentucky) when he asked congress for a blank check to defend F&F.



He got what he asked for.

Down the Rabbit Hole

Voltron says: Genius is the ability to hold two contradictory thoughts in your mind at the same time.

By Peter Schiff - EuroPacific Captial

In recent months, investors have been unjustly chastised for their lack of consistency. In truth, they have an unblemished record of drawing the wrong conclusions. Last week’s 2nd quarter GDP report provides the freshest evidence of market cluelessness.

In its report, the Commerce Department stunned economy watchers by showing a 3.3% annualized increase in 2nd Quarter GDP. The robust growth apparently wrong-footed those expecting further recessionary signals, lent further strength to the current dollar rally, and encouraged previously cautious investors to take another look at U.S. stocks. The strong number also bolstered claims by the Bush administration and the McCain campaign that a recession is primarily a psychological phenomenon. These conclusions would be at least quasi-logical if they were not based on a complete misreading of the report.

Without raising an eyebrow on Wall Street or in the press, the GDP deflator, used in the report to downwardly adjust GDP to account for inflation, was shown at just 1.2% annualized.... the lowest deflator in ten years. In other words, to arrive at a 3.3% growth rate, the government assumed that inflation is running at a ten-year low! In contrast, the latest reading on consumer prices (CPI) in the second quarter shows year-on-year inflation running at a 5.6% rate, a seventeen-year high! In fact, for the second quarter, the same time period measured by the GDP deflator, prices actually rose at an even faster pace of 8.0% annualized. How can it be that inflation is simultaneously running at a seventeen-year high and a ten-year low? Welcome to the Alice in Wonderland world of government statistics.

You would think that this statistical bombshell would raise the hackles of the press. Think again. Not only did the hawk-eyed media completely miss the story last week, they have totally ignored our subsequent attempts to show them the light (with the exception of the N.Y. Post’s John Crudele – who has long suspected a ruse). Although none of the reporters we spoke with could explain why inflation could run at a 10 year low and a 17 year high at the same time, they did not deem the anomaly sufficiently noteworthy. Having been ignored by reporters, I then tried the opinion pages. Unfortunately the piece that we prepared on the subject was rejected this week by all the leading national newspapers.

Reporter Michael Mandel did note the head scratcher on a Businessweek blog posting last Friday. As a partial explanation he pointed out the CPI measures the prices of what we buy, and the GDP deflator measures the prices of what we make. Although this certainly sheds some light, it offers no real explanation. Excluding imports and exports, both measures are determined by the same forces, and should move in relative harmony. If anything, the costs of what we make should be outpacing the costs of what we buy. Producer prices are now rising faster than consumer prices (the latest annual reading of the Producer Price Index ‘PPI’ being 13.2% annualized from the 2nd quarter), which helps explain why corporate profits have fallen drastically. In addition, from July 2007 through July 2008 (the latest data available) import and export prices have risen 21.6% and 10.2% respectively. In other words, no matter what numbers you use, the 1.2% GDP deflator simply doesn’t add up.

I have often argued that government statics are dubious, particularly those related to inflation. But here is an example where they are not even consistent! If we simply use second quarter CPI to adjust nominal second quarter GDP for inflation, the number would have registered a 3.5% annualized decline.

Such horrific GDP numbers are much more consistent with the anecdotal recession evidence that Wall Street and Washington want us to ignore (confirmed by today’s weak jobs report which included the unemployment rate spiking to 6.1%, a five-year high). However, with Orwellian propaganda, our government fabricates GDP growth out of thin air without the smoke and mirrors traditionally required for such an elaborate illusion. All that is required is to put out ludicrous statistics and hope no one notices. Given that this strategy appears to be working, expect future government numbers to get even more outrageous. After all, if they can get away with this, they can likely get away with anything.

Investors relying on this data and reacting to the global economic slowdown by buying dollars and other U.S. based assets while selling gold, commodities, and foreign assets, are jumping out of the frying pan right into the fire. My guess is that it will not be much longer before they feel the heat.

Market Update

Voltron says: Foreign stocks took a hit along with the rest of the market. The dollar went up so foreign stocks got a double whammy. John Authers from the financial times explains why and why it may reverse (link here). Mike Shedlock punks out Wells Fargo for raising it's dividend and then turning around and raising money from new investors (link here). Bill Gross, PIMCO's chief bond investor is screaming for a bailout (link here) He'll probably get it and the dollar will get trashed.

Say goodby to TiPS

Voltron says: The Treasury Secretary wants to get rid of TiPS (Inflation Linked Treasurys)  They have not been a very good inflation hedge because the government fudges the inflation index (CPI).  Without TiPS the government will be free to inflate away debt by debasing the dollar.

 

http://www.bloomberg.com/apps/news?pid=20601109&sid=atKnQFruecww

Breaking News: Lehman To Be Acquired by Tooth Fairy

The market responded with enthusiasm to reports that the Tooth Fairy has agreed to acquire Lehman. The purchase price has not yet been determined and will be set by Dick Fuld wishing upon a star, clicking his heels three times, and being transported back to that magical place where Lehman still sells for over $70 per share.

In related news, Lehman has agreed to sell all of its level III capital, including CDOs, ABSs, pet rocks, baseball cards, slightly used condoms, and credit default swaps written by MBIA and Ambac. Lehman’s level III capital will be acquired for 150% of its face value by Tinkerbell, who will carry it off to Neverland to be fed to a crocodile. Lehman is financing 90% of the acquisition at an interest rate that has not been announced; Tinkerbell’s up-front payment consists of a handful of pixie dust, three crickets, and a bullfrog. Analyst Dick Bove estimates that the bullfrog could eventually be transformed into three princes and a pumpkin coach. The deal gives Lehman no recourse to any of Tinkerbell’s assets other than the Level III capital. If Tinkerbell defaults, Lehman’s successor entity will stick its hand down the crocodile’s throat and attempt to get it to regurgitate. The firm’s historical value-at-risk analysis shows that sticking your hand down a crocodile’s throat is completely safe.

Treasury Secretary Hank Paulson issued a statement: “I am delighted that SWFs (Sovereign Wealth Fairies) continue to express confidence in the terrific values represented by American financial institutions. As I have been saying since August of 2007, this shows that the crisis is now over.”

Meanwhile, the SEC has announced an investigation of mean, evil, bad short-seller David Einhorn. While out for a beer with a friend, Einhorn reportedly suggested that the Tooth Fairy does not exist and that wishing upon a star is not a wholly reliable price discovery mechanism. Christopher Cox, chairman of the SEC, said, “Vicious rumors attacking the Tooth Fairy will not be tolerated. Our entire financial system and indeed the American way of life depend on the Tooth Fairy and wishing upon a star. How else could one value level III capital appropriately?” The SEC is reportedly planning to set up re-education camps for short-sellers.

Below is Korea's response to Lehman's offer to sell itself for 150% of book value (oddly it's in chinese).



If you can't read chinese turn your head to the right and read it sideways. You'll get it.

On the Link between the Dollar and Oil

Voltron says: from my former colleagues, a more nuanced explanation of how the price of oil is linked to the dollar. The gist is that there are several factors that cause the price of oil to rise when the dollar goes down in value. This is bad but it will likely continue for some time.

By Stephen Jen & Spyros Andreopoulos | London

Summary and Conclusions

While it is difficult to establish statistical evidence of causality, we believe that the USD and oil will likely remain negatively correlated, for various reasons. Oil prices, therefore, will remain an important – though not the only – consideration for the dollar. Specifically, lower and stable oil prices should be positive for the USD, while rising oil prices should be negative for the USD.

The Oil-Dollar Link

The circle of rising oil prices and a falling dollar was vicious. In contrast, the recent reversal of these trends is virtuous and, all else equal, positive for the world. Not only will lower oil prices help to support global demand, they should also permit greater monetary flexibility to deal with lower economic growth. (There are two aspects of the nexus between oil and the dollar: their correlation and the direction of causality. We have conducted Granger Causality tests, and found that, in practice, and for the most recent period (1992-2008), the dollar tends to lead oil, rather than the other way around.)

Until around 2003, higher oil prices were correlated with a stronger dollar. This was primarily because petrodollars were not only recycled back in to the US through trade but also because of financial flows: the US was dominant in every way back then, in terms of the attractiveness of its exports and assets. However, since 2004, this correlation has evaporated, and since 2006, the correlation has turned intensely negative.

There are several possible explanations for this negative correlation between oil prices and the dollar, especially the EUR/USD bilateral cross. We have, in previous work, touched on some of these reasons (see The USD and Oil Prices: Some Conceptual Issues, August 9, 2007). We list them here, paying particular attention to the direction of causality.

There are primarily three channels through which oil prices could affect the dollar:

• Link 1. Petrodollar recycling less dollar-friendly. The economic reliance of oil exporters on the US has declined over the years. Specifically, petrodollar owners now have a higher marginal propensity to consume European-made products than before. (Back in the 1970s, around 18% of OPEC’s imports were from the US. Now, this ratio has fallen to 9%, and OPEC sources 26% of its imports from the EU.) Also, they are likely to have a lower marginal propensity to invest in USD assets, simply because the array of assets in the world available to the petrodollar investors is now much wider than before. This is also related to the issue of reserve diversification by oil exporters. The establishment of the EMU has enhanced the liquidity of EUR-denominated assets, and intra-Eurozone divergence has preserved the diversification benefits of investing in EUR assets. Petrodollar owners have responded to these changing global financial markets. Thus, the higher the oil price, the more diversification takes place, and the weaker the dollar is.

• Link 2. Different central bank responses to oil shocks. Investors have different opinions about how the Fed and the ECB may react to rising oil prices, one opinion being that the latter might act more aggressively than the former, because of their different mandates. Thus, higher oil prices tend to lead to general expectations of a more hawkish reaction from the ECB – an inflation targeter – than from the Fed, which has a ‘dual mandate’ on growth and inflation. In other words, rate hikes in response to oil price rises appear more ‘automatic’ for the ECB than for the Fed. This may help to explain why EUR/USD and oil are correlated on a real-time basis – a trend that cannot be satisfactorily explained by the diversification argument mentioned above. Thus, in general, a higher USD price of oil may have conveyed to the world the impression that there was more global inflation than there really was. Monetary tightening in response to this positive inflation shock had further depressed the dollar, thereby perpetuating the circle.

• Link 3. High oil prices hurt the US C/A deficit. The US C/A deficit has shrunk rapidly since 4Q05, especially the non-oil portion of the C/A. (The US C/A deficit reached a peak of 6.8% of GDP in 4Q05, and has just breached the 5.0% GDP mark in 4Q07. It is likely to decline to around 4.5% by end-2008.) Indeed, trends in non-oil and oil trade balances have diverged substantially since 2005. While the former improved from U$40 billion to around U$30 billion a month, the oil trade balance – reflecting the sharp move in the US terms of trade – deteriorated from around U$20 billion to U$30 billion a month. In short, high oil prices have offset the tremendous improvement in the US external imbalance that has and continues to take place, and have prevented the dollar from being rewarded for this improving trend.

And there are three links through which the dollar drives oil quotes, in addition to the numeraire effect:

• Link 4. Feedback through the de facto dollar zone. The de facto dollar zone could also help to explain the link between the dollar and oil, and the causality running from the former to the latter. While the de facto dollar zone is looser now than two years ago, many Asian and other EM currencies are still quite ‘sticky’ vis-à-vis the dollar. Dollar depreciation effectively makes Asian exporters even more competitive, and economic buoyancy in these dollar zone countries (i.e., Asia) has led to high consumption of energy products. Therefore, a weak dollar may, on balance, increase the world’s demand for energy products.

• Link 5. Financial investment in commodities. There are anecdotal signs that institutional funds may be starting to treat commodities as a separate asset class. To the extent that real commodities are treated as ‘anti-dollars’, there could be a negative relationship between these two variables. Similarly, if commodities are seen as a hedge against inflation, expectations of higher US inflation will drive the dollar down and oil prices up.

• Link 6. Weak dollar and the lack of oil demand destruction. Many countries have tried to let their currencies appreciate in the past quarters so as to offset the impact of oil price increases in USD. But what may make sense from an individual country’s perspective has in fact been inflationary from the world’s collective perspective. Essentially, strong currencies provided an implicit subsidy on oil, and rising oil prices have not caused the level of demand destruction they should have done. As a result, oil prices continue to march higher, the longer this strong currency policy is maintained.

These are some explanations for why oil and the dollar have been so negatively linked since 2006. However, a further theory we have is that oil and the dollar could appear correlated only because they are driven by the same factor. We see this thesis as particularly relevant for the recent episode of oil price correction and the rise in the dollar. The dollar could have risen in the past month due to the ‘Dollar Smile’ effect. At the same time, a broad-based deceleration in global growth, on top of the oil demand-destruction that had already begun in many developed countries, should driver oil prices lower. As a result, the dollar rose at the same time as oil prices fell, not because one ‘caused’ the other, but because they were both driven by the same factor: a deteriorating global economic outlook.

Our Outlook for the Dollar, Conditional on Oil Price

We have two thoughts:

1. A strong dollar helps the world to rationalise on oil consumption. The vicious circle between a weak dollar and high oil prices was bad for the global economy. The contraction in Germany’s GDP was due to weak domestic demand, rather than exports. This raises the whole concept of ‘de-coupling’ and ‘re-coupling’, that Germany has not weakened because of a weak US or a weak world. Rather, it has weakened due, possibly, to the sharp energy shock and the credit crunch. As we argued under ‘Link 6’, a stronger dollar would force the rest of the world to rationalise energy consumption. A currency-based policy reaction to the oil price rise – such as the strong EUR policy adopted by the ECB – never made sense from a global perspective, in our view. This was a ‘negative-sum’ solution, due to the lack of oil demand-destruction. We believe that a virtuous circle of a stronger dollar and lower oil prices is what the world needs now.

2. Inflation-targeting central banks to become more dovish. Calmer commodity prices make sense if the global economy is decelerating. This should help anchor inflation expectations and permit inflation-targeting central banks to ensure that two-year forward inflation does not fall below their targets. The speed with which the RBA may make a U-turn (it last tightened in March, and may ease on September 2) on its policy and the market’s positive reaction to the RBA’s flexibility are a good example of what other inflation-targeting central banks (ECB, BoE, Sweden’s Riksbank, RBI, BoK, SARB and RBNZ) could do – though such a policy reversal may not come as soon as the case of the RBA, further supporting the dollar.

Bottom Line

The USD and oil are likely to remain negatively correlated for some time; the performance of the USD will in part be determined by the evolution of oil prices. For the global economy, a strong dollar/low oil price combination is much better than a cheap dollar/high oil price combination. Calmer commodity prices should also temper the hawkish bias that some inflation-targeting central banks have had.

Veterans Administration Loans

Voltron says: When VA and FHA loans are the only ones available, house prices will plummet and vets will be able to get great deals (i.e. mortgage payments at a steep discount to equivalent rent)

The Best Mortgage Deals Around

By Terry Savage

It's tough to get a mortgage today. But that's not news. Every financial institution is tightening lending standards, requiring a higher down payment and raising interest rates. Well, almost every lender is doing that.

If you're a veteran who has been honorably discharged from the military, you can get a great deal on a home loan.

The Veterans Administration (VA) has a mortgage guarantee program that is available to the more than 23.8 million U.S. veterans who were honorably discharged from service. But fewer than 2.1 million have taken advantage of VA loans. And they're missing out on a very good deal.

With a VA loan, veterans can get 100% financing without private mortgage insurance (PMI) and a 30-year fixed rate of 6.5%. There is a small origination fee paid to the VA, typically 2.4%, which is rolled into the mortgage itself.

The mechanics of the loan are relatively simple. Essentially, the U.S. Government guarantees 25% of a veteran's loan for a lender. So from the lender's point of view, the borrower is putting up a 25% down payment at the time of purchase. Thus, the borrower needs no cash to get the mortgage.

Very few mortgage brokers know about this type of loan, or work for companies that are registered to make them. I'm indebted to Daniel Chookaszian, vice president of sales at American Street Mortgage Company, for bringing this program to my attention. He specializes in making these VA loans to veterans, as well as FHA (Federal Housing Administration) loans to other homebuyers.

Chookaszian, who in addition to being a mortgage broker has a Master of Divinity degree from Moody Bible Institute and serves as a volunteer chaplain at a VA nursing home, says the program is a true benefit for our veterans. In fact, he teaches other mortgage brokers how to help vets apply.

Getting a VA mortgage starts, he explains, with making a call to the VA's Certificate of Eligibility Center at 888-244-6711 to secure the certificate authorizing the mortgage. The center keeps track of whether the veteran used all or part of his or her eligibility in the past.

Previously used eligibility must be deducted from total lifetime eligibility. Those limits may have expanded since a veteran's previous use of the program, which has been in effect since World War II, so that even older vets who previously used the program may be eligible for another loan guarantee.

The government will guarantee as much as $104,250 toward an owner-occupied purchase. That is 25% of the government-sponsored enterprises' (GSE) loan limit of $417,000. Under the recently passed Housing Bill, from July 30 to Dec. 31 of this year, some areas qualify for even higher government guarantee limits. Go to the FHA Lending Limits Web page to check for the limits in your state. The VA uses the same limits as FHA loans.

There are additional benefits to using a VA loan, if you qualify. Veterans may be required to pay for the following fees: credit report, origination, discount points, the Funding Fee, recording and title insurance, all of which are typically rolled into the loan. But veterans cannot pay for the inspection, document preparation, underwriting, processing, attorney, tax service or escrow. These costs can be paid by either the seller or the lender. This may save the veteran $1,000 to $1,300 in closing costs!

After qualifying a prospective borrower, Chookaszian funds the loan through a bank. And he assures me that most banks are still more than willing to make these loans because of the government guarantee. Plus, VA loans are made with more lenient income and credit standards than banks are currently demanding of conventional borrowers.

He points out that these VA loans are not as beneficial for those seeking to refinance, because in a "refi" the loan-to-value ratio is not 100%, but only 90%. And there is a slightly larger up-front VA fee than with a purchase.

For more information about VA mortgage loans, you can speak to the VA Loan Center at 800-827-0611, although they are not brokers and do not make loans. Or contact Chookaszian at 312-376-3760 or dchooks@americanstreetmortgage.com.

Not a Vet? Don't Forget FHA

Even if you're not a vet, Chookaszian says there may be an FHA solution to your mortgage problem. He's helped homeowners refinance out of adjustable rate mortgages and into fixed-rate FHA loans, currently fixed for 30 years at 6.5%, plus private mortgage insurance (PMI), which is part of the monthly payment. With an FHA loan, there is also a requirement that property taxes and insurance be escrowed every month as part of the payment.

Despite falling home prices, the FHA mortgage might be available to many homeowners, since it requires only a 97% loan-to-value ratio (3% equity) to make the loan. Because of the government guarantee on these mortgages, some lenders will make loans to those with credit scores as low as 500.

These FHA loans fell out of favor in recent years when banks started offering low-rate, no-money-down subprime loans. But in today's market a 30-year mortgage fixed at 6.5% looks like a real bargain, even with the private mortgage insurance payment.

So, while many complain that the government isn't doing enough to alleviate the mortgage crisis, the smart money is taking advantage of some relatively good deals that still remain. And that's The Savage Truth!

Cracks appearing in U.S. commercial real estate market

Voltron: more news about Lehman and good news for SRS:

http://www.iht.com/articles/2008/08/22/business/commercial.php


Voltron also says: don't worry about the gyrations of LEH. CFC did the same thing before the final swan dive into the abyss.

Moody's: U.S. Commercial Real Estate Prices Down for Fourth Straight Month

More "good" news for SRS:

http://www.economicnews.ca/cepnews/wire/article/110155

voltron says: why is this not already reflected in the price of SRS? Because those companies do not need to constantly revalue their real estate portfolio. It'll all come out in the end . . .

Market Update

Voltron says: The market has been very volatile the last two weeks with no clear trend. I think it's indicative of an inflection point and a breakout is coming.

Here is an article that explains the current market psychology and why you should not give up on foreign stocks and gold: http://www.europac.net/externalframeset.asp?from=home&id=13709

Here's a great article on Wells Fargo and why it's still a great shorting opportunity: http://mrmortgage.ml-implode.com/2008/08/14/wsj-wells-fargo-cheated-on-earnings-again/

Why DKA, DBN and DBU are down

Voltron says:  Looks like wisdom tree has some competition for foreign sector funds.  State Street’s new funds have slightly lower fees so people may be switching from the wisdom tree ETFs.  If that’s the case, it’s over done.  The fees are less than 1/10 of 1% lower.  Besides, wisdom tree’s funds are dividend weighted which is more in keeping with Peter Schiff’s philosophy of earning foreign dividends.

Investor's Business Daily
State Street Launches Foreign Sector SPDRs
Friday July 25, 6:13 pm ET
Trang Ho

State Street Global Advisors has unleashed a cluster of SPDRs that track the 10 sectors of the S&P World ex-U.S. Broad Market indexes. The new ETFs in the SPDR S&P International family are:

Consumer Discretionary (AMEX:IPD - News)

Consumer Staples (AMEX:IPS - News)

Energy (AMEX:IPW - News)

Financial (AMEX:IPF - News)

Health CareI (AMEX:IRY - News)

Industrial (AMEX:IPN - News)

Materials (AMEX:IRV - News)

Technology (AMEX:IPK - News)

Telecommunications (AMEX:IST - News)

Utilities (AMEX:IPU - News)

These compete with the iShares and WisdomTree international sector ETFs. The SPDRs charge 0.50% each in annual expenses, while their iShares counterparts charge 0.48% and WisdomTree 0.58%.

SPDRs Vs. IShares

The main differences between these and iShares S&P Global sector indexes: Unlike the iShares, the SPDRs don't include U.S. stocks. But they're much broader in scope.

They're a subset of the entire world index and hold companies with market caps of at least $100 million. The iShares family subdivides the narrower S&P Global 1200 index, though its offerings include companies with even less than $1 million in market cap.

The largest one by holdings, SPDR S&P International Industrial Sector, includes 1,200 stocks; iShares S&P Global Industrials (NYSEArca:EXI - News) has just 180 holdings.

SPDR S&P International Financial Sector includes more than 1,000 names. SPDR S&P International Telecommunications , with just 70 stocks, has the fewest holdings.

The iShares ETFs offer small exposure to emerging markets stocks, while the SPDRs includes only developed markets.

SPDRs Vs. WisdomTree

WisdomTree international sector ETFs also exclude U.S. stocks. The main difference is they're dividend weighted, while the SPDRs are market-cap weighted.

ETF experts expect these to perform similarly. Which you choose is just a matter of preference, says Gary Gordon, president, Pacific Park Financial.

"One person might be a stickler for fees," Gordon said. "That person should go with a State Street version over WisdomTree's. On the flip side, a long-term holder may prefer the higher dividend reward from the WisdomTree approach."

The worst hit U.S. sector as represented by iShares Dow Jones U.S. Financial (NYSEArca:IYF - News) plunged 35% in the past 12 months and 25% year to date. Foreign financials, as represented by WisdomTree International Financials (CDNX:DRK.V - News), sank 24% in the past year and 19% year to date.

Few U.S. sectors have outpaced foreign. But iShares Dow Jones U.S. Basic Materials (NYSEArca:IYM - News) returned 8% in the past year while WisdomTree International Basic Materials (NYSEArca:DBN - News) shed 5%. These are down 3% and 8%, respectively, year to date.

These additions bring State Street's total number of ETFs to 80.