Wednesday, August 19, 2009

Government Blowing Subprime Bubble Anew

News headlines these days are dominated by the administration's health care "reform" (this blog included), but we should be on the lookout for what may be slipping through with very few of us even noticing.

Like securitization of subprime mortgages.

If you think that's so 2007 and 2008, think again. Here's a healine from Wall Street Journal last week.

The Next Fannie Mae (8/11/09 Wall Street Journal): [emphasis is mine]

"Ginnie Mae and FHA are becoming $1 trillion subprime guarantors.

"Much to their dismay, Americans learned last year that they “owned” Fannie Mae and Freddie Mac. Well, meet their cousin, Ginnie Mae or the Government National Mortgage Association, which will soon join them as a trillion-dollar packager of subprime mortgages. Taxpayers own Ginnie too.

"Only last week, Ginnie announced that it issued a monthly record of $43 billion in mortgage-backed securities in June. Ginnie Mae President Joseph Murin sounded almost giddy as he cheered this “phenomenal growth.” Ginnie Mae’s mortgage exposure is expected to top $1 trillion by the end of next year—or far more than double the dollar amount of 2007. (See the nearby table.) Earlier this summer, Reuters quoted Anthony Medici of the Housing Department’s Inspector General’s office as saying, “Who would have predicted that Ginnie Mae and Fannie Mae would have swapped positions” in loan volume?

"Ginnie’s mission is to bundle, guarantee and then sell mortgages insured by the Federal Housing Administration, which is Uncle Sam’s home mortgage shop. Ginnie’s growth is a by-product of the FHA’s spectacular growth. The FHA now insures $560 billion of mortgages—quadruple the amount in 2006. Among the FHA, Ginnie, Fannie and Freddie, nearly nine of every 10 new mortgages in America now carry a federal taxpayer guarantee.

"Herein lies the problem. The FHA’s standard insurance program today is notoriously lax. It backs low downpayment loans, to buyers who often have below-average to poor credit ratings, and with almost no oversight to protect against fraud. Sound familiar? This is called subprime lending—the same financial roulette that busted Fannie, Freddie and large mortgage houses like Countrywide Financial."

"On June 18, HUD’s Inspector General issued a scathing report on the FHA’s lax insurance practices. It found that the FHA’s default rate has grown to 7%, which is about double the level considered safe and sound for lenders, and that 13% of these loans are delinquent by more than 30 days. The FHA’s reserve fund was found to have fallen in half, to 3% from 6.4% in 2007—meaning it now has a 33 to 1 leverage ratio, which is into Bear Stearns territory."

Is anyone listening? Not on Capitol Hill, not at the White House. They are busy further "empowering FHA" in order to help American people buy/keep their homes. FHA's downpayment requirement is mere 3.5%; with the first-time buyer credit it can be below 2%. FHA refinances mortgages of the borrowers who are 25% underwater.

This is just mind-boggling to me. We're back to subprime bubble, this time 100% government job. The government is directly blowing a subprime bubble, with explicit government guarantee.

Ginnie Mae is a U.S. government-owned corporation within HUD (Department of Housing and Urban Development), and FHA is a U.S. government agency.

This will not end well, I'm afraid.


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