The Ginnie Mae 'Inflation Guarantee'

The Ginnie Mae 'Inflation Guarantee'

By Dan Ferris | 11 March 2009

The Government National Mortgage Association, known as Ginnie Mae, says it now has a 40% share of the mortgage-backed securities market. Ginnie Mae guarantees mortgage-backed securities made up of loans issued by the FHA, Department of Veterans Affairs, Rural Housing Service, and the Office of Public and Indian Housing. Ginnie Mae securities are the only mortgage-backed securities explicitly 'guaranteed' by the U.S. government.

These days, lenders can't get licenses to make FHA loans fast enough. The Department of Housing and Urban Development (HUD) is working weekends, something it's never done before, to process FHA license applications. In the fiscal year ended September 30, 2008, HUD approved nearly 3,300 applications, more than triple the previous year.

About 70% of the new applications are from brokers who are no longer able to sell subprime loans. Mortgage brokers have an incentive that trumps all others: Ram as many loans through as possible, damn the credit quality. It makes me wonder… Where are all these new FHA-qualified borrowers coming from? Where were they two years ago?

I'll tell you where. Fannie and Freddie have had to tighten up their standards. These days, they can't guarantee a loan with a higher loan-to-value ratio than 80%, so market makers have to go to the private mortgage insurers. But private mortgage insurers have had their balance sheets destroyed, along with everyone else in the industry, so they're not doing much business these days.

Instead, it's off to the FHA for the loan and Ginnie Mae for the guarantee.

The FHA/Ginnie Mae conduit is one of the last places where you're allowed to shove a risky loan through. One of the hallmarks of the credit crisis is that few buyers really owned the properties they were buying. They had as little skin in the game as possible, increasing their incentive to take bigger risks and to walk away if the deal went bad. Many deals are going bad. Many buyers-but-not-owners are walking away.

Today, if you want to buy but not own so much, you don't go subprime anymore. You go FHA.

This feels terribly familiar. It's like a mob of passengers on the deck of a ship. Everyone ran to one side (the Fannie and Freddie side), causing the ship to roll, so now everyone is running to the other side (the Ginnie Mae side). I don't think Ginnie Mae will ever wind up like Fannie and Freddie, because it has that explicit government guarantee standing ever ready. It's already been taken over by the government.

But what if Ginnie Mae guarantees a whole new slew of bad mortgages the government winds up having to make good on? Ginnie Mae issued $220 billion worth of mortgage-backed securities in 2008. It expects to do at least $300 billion in 2009. Those aren't big numbers, but you know how it goes… $200 billion here, $300 billion there… pretty soon, you're talking real money!

The rapid growth of a government-guaranteed conduit that accepts, securitizes, and guarantees loans with less equity is just the sort of situation that eventually creates yet another reason to print money and keep interest rates way too low. Add to the Ginnie Mae problem the [[substantial: normxxx]] deterioration of the Federal Home Loan Banks' balance sheets and their recent reduction of capital requirements, and you see another kind of inflation. Ginnie Mae says, "It doesn't matter. The government will pay."

It knows the Federal Reserve can print its way out of any problems. The FHA/FHLB says, "The capital requirements are whatever we say they are," again knowing that at the bottom of it all sits a Fed bureaucrat typing new numbers into a computer, numbers that raise the supply of money and credit and cause a massive inflation. The government continues to eschew and even mock the need for any kind of discipline in the allocation of capital.

Wall Street did a lousy job of it, so the government took over. Now the government will do an even lousier job because, unlike Wall Street, it can make all its own rules. It can get away with it because we, whipped dogs that we are, have already ceded it so much of our power… power to tax… power to print money… power to tell us what to do or else.

Anyway you look at the current situation, the outcome has the same basic shape: The U.S. government gains more power and the U.S. dollar is burnt toast. Investors need to protect themselves now. Buy gold and hold on for dear life. [[FWIW, gold is now in a confirmed bear market.: normxxx]]

Regards,

Dan Ferris
Medford, Oregon
January 29, 2009

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Normxxx    
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