Two words that usually fit together in most
countries but simply don't work in the US are "mortgage" and
"market".
The "mortgage market" in the US
is slightly closer to a free market than the "postal market", but not
by much.
It's no secret that Alt-A loans (those with
an initial low interest period) are beginning to reset to market interest rates
over the next few months. In fact, it's
with the full knowledge of this that the government seems to have embarked on
the most ambitious scheme in history to reflate the housing market -- or at
least sweep the fallout under the tax-payers' carpet.
The way the government is preventing the
mortgage business functioning like a market is by guaranteeing nearly all new
mortgages.
The three stooges -- Fannie Mae, Freddie
Mac, and Ginnie Mae -- have combined
with the Federal Housing Authority to guarantee nearly 90% of all US
residential mortgages.
Fannie and Freddie are now government owned
and controlled, and have implicit government (tax payer) guarantees. Ginnie and the FHA have always been government
owned and are explicitly backed by the government.
To take the heat off Fannie and Freddie --
who have been rightly vilified in the news -- the government has pushed some of
these "we'll keep you in your home" type policies into the FHA and
Ginnie Mae.
One of the policies was aimed at getting
the securitization market working again.
One way would be to ensure that all
mortgages bundled into a security had a maximum loan to value ratio of 70%
based on independent valuation, and that none of the loans had been 30 days or
more overdue in the past year.
A much easier way is to simply do business
as usual and slap a government-backed Ginnie Mae guarantee on whatever crappy
loans the banks were trying to palm off to unsuspecting local and municipal
governments.
It's pretty obvious which course of action the
government would choose.
Since 2007 -- the peak of the housing
bubble -- Ginnie Mae has increased its guarantees by over 50% to $700 billion
and should exceed a trillion by the end of next year.
Because all of these guarantees have been made
in a bear market, the likelihood of a fair chunk going sour is approximately
100%. As for losses that will get passed
onto the taxpayer? Who knows? Tens of billions and change by the looks of
it.
But hey... if spending $3 billion on
destroying perfectly good cars is a good idea, then ten times that on NOT
destroying anything (except value) is a great deal!
But that's just Ginnie Mae. The FHA is in an even worse state -- and
headed for bigger trouble with a bit of help from Capitol Hill.
The FHA is the main tool of the Obama And
Friends' policies to keep people in their homes. This includes great ideas such as letting
home owners who are underwater refinance with a 30% loan-forgiveness. This program -- and the tens of thousands of
loans -- has been dropped on the FHA.
Because the test for refinancing is
completely needs-based ("Each according to his need...") the
refinancing goes to people who can't afford any sort of mortgage and are most
likely to default again.
The first 30% loan forgiveness comes
straight out of the FHA's reserves, and the second the third defaults will put
even more pressure on the reserves.
Currently, the FHA has reserves of less
than 3%. So if 10% of all its loans were
refinanced in this way -- even if the other 90% were perfectly sound and never
defaulted -- it would wipe out its reserves in a flash.
But the other loans aren’t safe. As of June, the 7% of the FHA's loan
portfolio was already in default. But
worse is clearly coming, because unlike other lenders which ask for at least a
10% down payment, the FHA asks for all of 3.5%.
That means that not only are the people the
FHA is lending to are demonstrably poor savers (they only need $8,750 to buy a
$250,000 house) but the property would only have to fall by 5% to put the new
home owners underwater and make them eligible to refinance.
Clearly, both the FHA and Ginnie will need
a huge bailout in the near future -- probably the first of many.
So far the government has pumped $85.9 billion
into the two black holes of Fannie and Freddie -- of the $400 billion so far
committed. As these two have been used
by the government for refinancing troubled loans -- for up to 125% of the value
of the house -- the government is effectively excavating the bottom of the hole
while it pours money into it.
The FHA and Ginnie Mae are headed the same
way. While the losses will be lower,
they are losses the government hasn't yet budgeted for. A conservative 10% loss would only be around
$172 billion for the two of them -- assuming the government doesn't come up
with any great new ideas. That will bring the total future bailouts for the three stooges and the FHA to $486 billion.
Heck, what's $486 billion anyway? Government spending has already topped $3
trillion this financial year -- $27,000 per family -- to make the country
richer!
