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August 11th, 2009

Are Ginnie and the FHA the New Subprime?

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An opinion piece in the Wall Street Journal today warned readers that Ginnie Mae and the Federal Housing Authority (FHA), because of their growing influence in the mortgage market, are quickly becoming a growing financial liability to American taxpayers:

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.

What concerns the author of this op-ed article most is the FHA’s “notoriously lax[ed]” program. Besides acknowledging the level of  fraud that’s already permeating FHA loans, the author highlights that the FHA’s “loosy-goosy underwriting standards,” minimal downpayment requirements, costly modification program, and a refi program with an elevated redefault rate, all as signals that Ginnie Mae and the FHA are quickly growing into the next Fannie Mae and Freddie Mac:

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.

We’ve long argued that Congress has a fiduciary duty to secure the safety and soundness of FHA through common sense reforms. Eliminate the 100% guarantee on FHA loans, so lenders have a greater financial incentive to insure the soundness of the loan; adopt the private sector convention of a 10% down payment, which would reduce foreclosures; and stop putting subprime loans that should have never been made in the first place on the federal balance sheet.

Despite Freddie Mac’s announcement that they posted a second-quarter profit, the two GSEs have been a substantial financial drain on taxpayers to the tune of billions of dollars.

There are well-known and documented risks of making loans to less-creditworthy borrowers or those with low downpayments. HUD tried to address this via using risk-based premiums but were denied. With the collapse of private subprime lending, FHA is now growing so fast that it is unlikely to be able to manage the risks which face the insurance pool.

In some cases, taxpayers may end up covering a single borrower’s losses twice, as at least some failing borrowers are being “modified” or refinanced into FHA-backed loans.

When Fannie and Freddie grew so fast at the early part of the decade, Congress took interest since it represented a theoretical risk to taxpayers. We wonder: with FHA’s direct risk to taxpayers, where is the concern and oversight? Is anyone paying attention to the potential for loss here, or is homeownership desirable at any cost?

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3 Responses to “Are Ginnie and the FHA the New Subprime?”

  1. Steve Says: August 12th, 2009 at 8:51 am

    It’s about time the media looked at this issue. Seeing the volume of FHA lending; hearing anecdotal stories of people who had no chance of getting a conventional loan getting an FHA loan with ease; seeing two FHA loans with FICO scores under 625 and loan to value ratios of 98: doesn’t all this sound eerily familiar? It should.

    No question the 100% government (read: taxpayer) guarantee should be eliminated. Neither the lender nor the borrower has enough skin in the game. And you can no longer count on rising house appreciation to cover underwriting mistakes (not that you ever really could; that was more of a palliative than a remedy, like wearing a tweed jacket to hide dandruff).

  2. Tim Manni Says: August 12th, 2009 at 11:27 am

    Steve,

    Great comment ( that last sentence may have been the best haha).

    Do you think this is the case where a product (FHA) has gone outside it’s given audience and gotten too big for its own good. Or, has the credit crunch and financial constraints “forced” borrowers to apply for loans with less of a DP, lower required credit score, etc? I’m sure it’s a little of both.

    But the truth is, this is a rapidly exploding product that allows for poor credit-quality borrowers to get a home…As you said “doesn’t all this sound eerily familiar? It should.”

    Thanks for commenting, hope to hear from you again soon,
    Tim

  3. FHA Secure Loan Says: August 26th, 2009 at 10:07 pm

    The financial crisis has practically swept the entire world, affecting both large and small economies. The American economy has not been spared from the battering, and it has inevitably shown in the rising unemployment rate, and as a consequence, the number of people getting further buried in debt and losing their houses to foreclosure increases.

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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