The Federal Housing Administration (FHA) has repeatedly said its reserves for loan losses would decline below the federally mandated 2% by this fall. But (no surprise to Digest readers) it's already broke. An audit of the FHA released Thursday showed capital reserves fell to $3.6 billion as of September 30, down 72% from a year earlier. That leaves reseves at 0.53% of the $685 billion in outstanding FHA loans.
The FHA says it won't need a government bailout, except under "the most severe economic scenarios." Considering the number of loans the organization now insures, the caliber of borrower the FHA insures, and that a mere half-percent drop in loan values would wipe out the FHA's equity... the organization may be understating its problems.
Artificially low mortgage rates, homebuyer tax credits, and FHA insurance are the only things propping up the real estate market today... Once one of the three legs breaks, housing is doomed.
The FHA now insures the majority of new home loans in the U.S. More than half of all FHA-insured loans have an initial loan-to-value of 95% or more. And FHA loans only require 3.5% down, meaning when things go south, the borrower will have little reason to save his/her home (we've seen how that situation plays out). Already, more than 14% of FHA loans are in default – more than three times the average for conventional mortgages. And the newest loans are defaulting the fastest.
We'll say it again... The failure of the FHA is inevitable, and U.S. taxpayers will foot another $100 billion bailout.
And how will the government continue providing these massive bailouts? Higher taxes, of course. Democrats in the House of Representatives are pushing for a 5.4% surtax on incomes greater than $500,000 for individuals and $1 million for joint filers. The government expects the new tax, which includes both capital gains and dividends, to raise some $460.5 billion.
The new tax kicks in on January 1, 2011 – the day the Bush tax rates of 2001 and 2003 expire. Today's capital gains tax of 15% would jump to 20% with the expiration of Bush's policies. The surcharge will bump the tax to 25.4%... That's a 69% increase. Encouraging people to dump stock in the face of a looming market downturn is a swell way to save our economy.
Matt Badiali's "new favorite silver company" just announced huge second-quarter results. Silvercorp Metals, a billion-dollar Chinese silver miner, increased production by 35% to 1.2 million ounces. But what's really astonishing is its cost per ounce... It has none. Silvercorp's ore is so rich in lead and zinc, it can mine silver for FREE.
The company receives an extra $6.33 for every ounce of silver it produces. That means its effective silver price was more than $17 per ounce produced. Today, its effective silver price should be up around $23 per ounce (spot price is $17 + $6 extra).
The company is second in profit margin only to Silver Wheaton, a silver "streamer" that doesn't operate mines.
S&A Resource Report readers are up more than 84% on Silvercorp since June.
Matt has found two other ways to invest in China's booming precious-metals industry. Both are small gold miners that produce gold with the help of the Chinese government... the only way to make money mining in China. To learn more, click here.
New highs: BNSF (BNI), Microsoft (MSFT), IMS Health (RX).
In the mailbag, kudos to Kossuth, what will happen to your physical gold, and what I wish I knew at 18 years old. Anything else we should discuss? Let us know... feedback@stansberryresearch.com.
"Thank you very much for inviting me to the Alliance Conference in Kiawah. I had a great time meeting all the other members and hearing all the speakers. The entire event was 1st class from start to finish. I would like to say thank you to Kristen Kossuth. From the moment I arrived, everything was taken care of. The venue was wonderful, the food was superb, and everything was well organized and went off without a hitch. I was very impressed with all Kristen's work, and when I came downstairs after breakfast on Monday and finally met her, I thought WOW! what a beautiful, elegant woman. You really have a great representative for your business in Kristen. Hold on to her! I look forward to seeing all of you again next year, doom and gloom not withstanding." – Paid-up subscriber Charlie Leckinger
Porter comment: You're exactly right. She is a superstar. I won't work without her.
"Just read that Porter asked 250 members at the Alliance Conference if they had enough gold bullion to live off for a year, only 10 people raised their hands. One-third had 15% of their investable assets in gold. Is it possible that they feel President Obama, could pull a Franklin Delano Roosevelt confiscation of gold, during Obama's term in office. Roosevelt did it in 1933,as you know... They are desperate in Washington DC and will do most anything... Recently read where the State of California is going after unvisited bank safe deposit boxes... that too is real desperation." – Paid-up subscriber Walter
Porter comment: That's why I like self-storage...
"OK – I'm slowly getting your message about owning gold bullion – taking possession, and hiding it. Can I ask your opinion on the safety and merits of Perth Mint Certificates? In theory, it's a certificate of ownership, but not possession of, gold – backed by an Australian government. It's supposed to be redeemable for bullion. Is the risk of future governments forbidding the physical possession/ ownership of gold any less likely with countries outside the U.S.?" – Paid-up subscriber John
Porter comment: I just don't know much about it, so I can't tell you. I'd recommend talking with our friends at Asset Strategies International if you have questions. You can find their contact information here. I know they deal in the certificates. One thing I'd point out, though... you can't bury certificates.
"My question [for Atlas 400 investment experts] would be – what is the best advice to an 18 year old graduating from high school? Go to college, work, combination of college/work, other? What do you wish you knew at 18 that you know now?" – Paid-up subscriber Ann Campbell
Porter comment: I think the most important thing to know when you're 18 years old is that no one owes you anything... and generally speaking, no one is going to give you anything either. So if you want to accomplish anything with your life, you're going to have to compete for it. That means you have to be prepared to work hard and persevere.
Most people can't and won't do these things. When I was fired in 1999, the publisher I was working for told me I was the least talented, least entrepreneurial person he'd ever met. If I wasn't determined to succeed in financial publishing, that would have been it for me. Most successful folks you talk to will tell you the same thing: The most important thing is simply not to give up, not to quit.
Of course, if you don't know what you're doing, no amount of hard work is going to make any difference. In that regard, going to college is important – if you use the time to learn something valuable, like accounting. Most people don't, though... They waste time learning about things that are, at best, just hobbies. And remember: The folks teaching college typically aren't very talented. If they were, they wouldn't be teaching.
To really learn something, find a way to get close to someone who is successful. Brian Hunt, our editor in chief, got his job with Stansberry Research because he walked up to Steve Sjuggerud and said, "You're a great investor. I want to learn from you. I'll work for free. And I can do anything you need done." It didn't take long for Hunt to prove he was one of the most talented people we've ever hired. And he became our editor in chief within a couple years...
So to summarize... Learning doesn't end with college. It's only a beginning. Don't be afraid to start at the bottom. Work hard. Don't give up.
Regards,
Porter Stansberry and Sean Goldsmith
Ambergris Caye, Belize and Baltimore, Maryland
November 13, 2009