Government Picking Up Subprime Slack

October 28, 2009

According to a new report from the Federal Reserve Bank of San Francisco, the Federal Housing Administration has “revived” the subprime segment of the housing market. Thanks to FHA lending, “the share of borrowers with FICO credit scores lower than 660 has returned to just higher than 20 percent, the same share as when subprime securitization peaked in 2006.”

In August, the Wall Street Journal warned that the Government National Mortgage Association (Ginnie Mae), which guarantees mortgages backed by the FHA, was on pace to join government-run Fannie Mae and Freddie Mac “as a trillion-dollar packager of subprime mortgages.”

As the Journal noted: 
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. 
The Federal Reserve report confirms that Ginnie Mae, along with Fannie and Freddie, don’t just dominate the housing market – they practically are the housing market:   
In the present day, when Ginnie Mae’s activities are included, the three GSEs are providing unprecedented support to the housing market—owning or guaranteeing almost 95 percent of the new residential mortgage lending. 
There is a saying that the definition of insanity is doing the same thing over and over and expecting different results. The economy is currently in collapse due in part to the housing boom and bust fostered by ill-advised government policies. While private mortgage companies are taking on less risk in the wake of a painful lesson, the government is rushing in with reckless abandon. Insanity, indeed.



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