My publication preaches how the speculative credit binge of the recent period laid the foundation for the stunning collapse of stock and real estate prices. The collapse of these markets, of course, has far-reaching effects in the economy. There is also some recognition by the general public, private institutions and government that such speculative excesses were responsible for the financial quagmire. Given this recognition, why would our extraction from the quagmire be the same prescription for what delivered us into the quagmire?
 

The Federal Government created Ginnie Mae (Government National Mortgage Association) in 1968 as a partition of FNMA (Fannie Mae). This organization’s mission is to bundle and sell mortgages insured by the Federal Housing Administration (FHA).

These mortgage-backed securities are backed by federally insured or guaranteed loans. FHA’s spectacular growth means the organization now insures $560 billion in mortgages. Forecasts predict that by year’s end, Ginnie Mae’s mortgage exposure will top $1 Trillion. Along with Fannie Mae and Freddie Mac, Ginnie Mae provides some federal taxpayer guarantee for nearly 9 out of 10 new mortgages in the US. Moreover, the scope of the federal guarantees is the heart of the problem.

What are some of the characteristics of the FHA

insurance program? The program features low down payment loans to homeowners of below average to poor credit ratings. The profile of such a lender should be familiar to all and we came to know these loans as sub-prime loans. The very type of loan that toppled Fannie Mae, Freddie Mac, and Countrywide Financial is back in vogue! Statistically, 7% of FHA’s loans are in default and 13% are delinquent by more than 30 days. The reserve fund backing the insured loans is now 3% implying a leverage ratio of 33%, which is dangerous territory. Refinancing programs approved by Congress add to these woes as hundreds of thousands of borrowers presently unable to pay mortgages move to FHA programs. This includes loans in the sub-prime and other exotic realms. Part of the refinancing program includes mortgage reductions of up to 30% to mitigate imminent foreclosures. Naturally, the 30% loan forgiveness must be taxpayer financed. There are cases of borrowers with 25% negative equity qualifying for refinancing under this program. The latter case is especially troubling since one has to ask how many banks would willingly offer refinance terms to a borrower when their collateral is 25% less than the loan amount? Is it even a smart proposition for a borrower to enter into such a loan? How many of these borrowers will default even with new mortgage terms?

Part of the answer to this question came in an October 8 story in Bloomberg.


In the story, a former Fannie Mae executive noted the FHA might require a bailout (a familiar term lately) due to potential losses of $54 billion. So consider that one of the pillars of the US mortgage industry is essentially bankrupt.

Regrettably, the actions precipitating the credit bubble formerly catalyzed by the private sector now appear in the public and quasi-public sector. While private institutions received significant castigation by the likes of individuals and elected officials, the bubble appears again. The programs place additional burdens on an already overburdened federal budget. These actions, however, are characteristic of a “last gasp” in the continuum of the recently popped credit bubble. The only entity capable of reflating this bubble, Government, will haunt its citizens with this unnecessary profligacy.

Jim Mosquera is the editor of The Sentinel Economic and Financial Newsletter.