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September 10th, 2009

It’s a Bird, It’s a Plane, It’s…the Next Taxpayer Bailout!



When the nation’s banks invested heavily in the private mortgage market, taxpayers were left to pay the $700 billion tab it has taken so far to clean up their mess. Now, with about 8,500 federally-insured banks again investing heavily in the shaky American mortgage market, who do you think will be left to pick up that tab when or if that market collapses? Ding, ding, ding — you guessed it — the American taxpayers!

During the housing boom, the mortgage-backed securities in which the large banks invested in were chock full of subprime and poorly-underwritten loans. Since the collapse of the housing market, lenders have ceased writing new subprime loans or any which can’t be easily sold. All the way back in January we predicted that a lender or lenders would eventually come along to cater to the under-served, “non-prime” audience. That lender turned out to be the Federal Housing Administration (FHA), a.k.a the Federal government.

By spring, it was apparent that as FHA loans grew in popularity, so did their risk of default. By August, we fully acknowledged the momentous financial risk that the FHA and Ginnie Mae posed to taxpayers.

For those unfamiliar with Ginnie Mae and their connection to FHA loans, here’s a great breakdown of what they do and why their skyrocketing popularity poses such a threat to taxpayers (emphasis added):

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.

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.

Despite the financial risks to taxpayers — that seems to be gathering the momentum of an avalanche — thousands of banks across the country are buying up Ginnie Mae mortgage-backed securities by the fistful because, to the banks, they pose no risk (emphasis added):

As of June 30, the roughly 8,500 federally insured banks and thrifts were holding $113.5 billion of Ginnie securities, compared with just $41 billion a year earlier, according to a Wall Street Journal analysis of bank financial disclosures. It is the largest amount that banks have reported holding since at least 1994.

Banks, sometimes with the blessing of federal regulators, have been loading up on Ginnie securities for one main reason: They make their balance sheets look healthier. Since the securities are guaranteed by the government, federal banking regulators have deemed them risk-free, meaning that adding them to a bank’s investment portfolio, or replacing assets deemed riskier, lowers the overall risk of the portfolio in the eyes of regulators.

Some banks have used government cash infusions under the Troubled Asset Relief Program [TARP] to buy Ginnie Mae bonds.

And yes, you are reading that correctly — some banks are using the first round of bailout money to invest in securities, which may end up costing you even more money. It goes without saying that this recycling of cash does nothing to stimulate the private mortgage industry.

The mounting losses at the FHA aren’t putting the banks at risk, they’re once again putting the American taxpayers at risk.

For more on this subject read “(When) Will FHA need a bailout?

4 Responses to “It’s a Bird, It’s a Plane, It’s…the Next Taxpayer Bailout!”

  1. home equity line of credit Says: September 12th, 2009 at 9:53 pm

    Hi. important job. I did not expect this on a Wednesday. This is a great account. Gives Thanks!

  2. The Financial Crisis – Part 2: The Rest of the Story | Naked Liberty Says: October 15th, 2009 at 3:41 pm

    […] It’s a Bird, It’s a Plane, It’s…the Next Taxpayer Bailout! (hsh.com) […]

  3. build solar panels Says: November 27th, 2009 at 4:11 am

    Nice information there! I just thought of to become your regular reader but the problem is your site doesn’t seem compatible /friendly when it show in KMeleon browser which I use regularly other than internet explorer, hope you can get it fix soon, thanks in advance.

  4. Tim Manni Says: November 30th, 2009 at 11:59 am

    Solar Panels, Thanks for the comment, we’ll certainly look into fixing that problem, thanks. -Tim

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About the HSH Blog

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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