“Today I Think Of Myself As A Government Contractor……”

No Easy Exit for Government as Housing Market’s Savior WSJ

After a year of extraordinary interventions in the economy, the federal government is starting to pare its support for the private sector. It doesn’t look that way to Peter Lansing, president of mortgage firm Universal Lending.

The Denver home lender sees every day how dependent the housing market has become on the government. At the height of the boom, just 20% of Universal’s mortgages were backed by the Federal Housing Administration, an arm of the government that guarantees loans to borrowers who can’t afford big down payments. Today, the FHA accounts for more than 80% of his business. For Mr. Lansing, this represents a new way of life — more government, more paperwork, but also a lot of sales that wouldn’t have happened otherwise.

"Over 29 years in business, we’ve always thought of ourselves as being in the free-enterprise system. Today I think of myself as a government contractor,"

Over the past year, the government has intervened heavily at essentially every stage of the home-buying process. In fact, more than 80% of the new residential mortgage loans made this year benefited from some form of government support, according to the trade publication Inside Mortgage Finance.

Speaking of CHUZPAH…….

Einigen Bänkern sind selbstredend auch die 80% noch zu wenig……

Wells Fargo urges US to boost mortgage market

The US government should help revive the moribund market for big mortgages by getting Fannie Mae and Freddie Mac to buy large home loans from banks, the chief executive of the lender Wells Fargo urged in an interview with the FT on Tuesday. John Stumpf, whose bank originates a quarter of all US mortgages, called for an increase in the size of loans purchased by Fannie and Freddie, the troubled finance groups controlled by the authorities.

Buffet will be proud ……

Behind FHA Strains, a Push to Lift Housing WSJ

The FHA insures loans secured with down payments as low as 3.5%. But values in many markets in which it has been increasing its activity have fallen far more than that in the past year. The result: A growing number of homeowners with FHA-backed loans owe more than their homes are worth and are more likely to default.

At the end of June, some 7.8% of FHA-backed loans were 90 days late or more, or in foreclosure, according to the Mortgage Bankers Association, up from 5.4% a year ago.

In July, California accounted for 13% of the FHA’s mortgages, up from 1.5% in 2006.

Mounting losses have eaten into the FHA’s cash cushion. Federal law says the FHA must maintain, after expected losses, reserves equal to at least 2% of the loans insured by the agency. The ratio last year was around 3%, down from 6.4% in 2007.

The Next Fannie Mae : Ginnie Mae and FHA are becoming $1 trillion subprime guarantors WSJ

Banks Load Up on Mortgages, in New Way WSJ

Banks have been silent partners in the meteoric rise of the Federal Housing Administration.

In the past year, the nation’s financial institutions have snapped up securities backed by Ginnie Mae, a government-owned agency that guarantees payments on mortgages backed by the FHA. That helped drive demand for Ginnie securities and created an outlet for billions of dollars of FHA-backed loans made to borrowers who in many cases couldn’t afford big down payments.

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 to buy Ginnie Mae bonds.

Holding Ginnie bonds help banks look better because federal bank-capital guidelines give the Ginnie securities a "risk weighting" of 0%. That means banks don’t have to hold any cash in reserve to protect against losses. By contrast, securities backed by Fannie Mae and Freddie Mac, the two mortgage giants seized by the government, carry a 20% risk weighting, meaning some cash needs to be set aside to hold them, even though most banks and investors think there is scant risk of Fannie or Freddie securities defaulting. Privately issued mortgage-backed securities can receive risk weightings of 50%, while many other types of debt carry 100%.

Because of the different risk weightings, bankers say they are selling relatively safe assets like Fannie securities and replacing them with Ginnie securities. The move doesn’t shrink banks’ balance sheets or remove their troubled assets. But it reduces their total assets on a risk-weighted basis. That is important because risk-weighted assets are the denominator in some key ratios of bank capital.

Like some peers, First State bankrolled those purchases partly with taxpayer dollars that were intended to stabilize the banking industry and jump-start lending. The 32-branch bank used a "significant portion" of the $20 million it received through TARP to buy Ginnie securities, Mr. Clark said.

Mr. Clark credits the strategy with helping First State preserve its capital ratios even as loan defaults swelled to $9.5 million on June 30 from $1.6 million a year earlier. During the same period, its total risk-based capital ratio climbed to 11.3% from 10.7%. That gave First State some breathing room above the 10% ratio regulators require for banks to be deemed "well capitalized."

Ms. Keeling acknowledged that the strategy doesn’t ease the bank’s underlying problems. "The whole capital ratio can be manipulated … in many ways to make it appear better or worse," she said.

In St. Augustine, Fla., Prosperity Bank increased its holdings of Ginnie securities tenfold over the past year. The lender, with 20 branches and $1.2 billion in assets, simultaneously dumped most of its Fannie and Freddie securities, even though they seemed safe.

"There’s no more risk in Fannie and Freddie securities than in a Ginnie security," despite the different capital treatments, said CEO Eddie Creamer.

Ginnie and the FHA, units of the U.S. Department of Housing and Urban Development, have become two of the most powerful mortgage financiers in the U.S. When banks make home loans, the FHA insures them against default. Then the mortgages are pooled together and packaged into mortgage-backed securities. Ginnie guarantees that buyers of those securities — including banks and other investors — will continue to receive interest and principal payments on the debt, even if borrowers start to default.

Rolfe Winkler nails it!

"It’s equally likely the agency will continue to be a conduit through which the Obama administration funnels cash to the housing market"

Over $600 billion of loans backed by the end of this year — many very risky due to very low downpayments — but no chief risk officer….

A canary in the coal mine was the raid on Taylor Bean & Whitaker, a multi-billion dollar lender that had seen its FHA lending business expand very quickly over the past year. But TBW’s underwriting was terrible so FHA suspended them from issuing its loans. By the end, TBW’s business had grown to $100m-$150m worth of loans per day. The suspension put TBW out of business overnight.

Karl Denninger is also "passionate" when it comes to the FHA topic….. 😉