The Next Fannie Mae (Ginnie Mae and FHA are becoming $1 trillion subprime guarantors)

Much to their dismay, Americans learned last year that they “owned” Fannie Mae and Freddie Mac. Well, meet their cousin, Ginnie Mae or the Government National Mortgage Association, which will soon join them as a trillion-dollar packager of subprime mortgages. Taxpayers own Ginnie too.

Only last week, Ginnie announced that it issued a monthly record of $43 billion in mortgage-backed securities in June. Ginnie Mae President Joseph Murin sounded almost giddy as he cheered this “phenomenal growth.” Ginnie Mae’s mortgage exposure is expected to top $1 trillion by the end of next year—or far more than double the dollar amount of 2007. (See the nearby table.) Earlier this summer, Reuters quoted Anthony Medici of the Housing Department’s Inspector General’s office as saying, “Who would have predicted that Ginnie Mae and Fannie Mae would have swapped positions” in loan volume?

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.

The next Fannie Mae is called CARS - aka “Cars for Clunkers”.

What caused the financial meltdown? The gummint encouraging banks to loan money to some people to buy houses who couldn’t afford them.

Now what is the Clunker program? The gummint encouraging car dealers to sell new cars to some people who can’t afford them.

Come back in a year and see how many cars unemployed people traded for are sitting on the repo lot.

In talking to my invest guy, I asked him the difference between a mutual fund investing in Intermediate term gov’t bonds and a Ginnie Mae Fund also investing in these same interm. term gov’t backed securities. His answer was almost none. If the prospectus of say the Fidelity Ginnie Mae Fund can be believed it invests over 80% of assets in strictly US Treas obligations and zero in stocks.

Anyway he explained the differences between Ginnie Mae, Freddy Mac and Fannie Mae as follows. My question is how does this change or effect the safety of the fund relative to capital preservation?
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Ginnie Mae is a self-sustaining, profitable government institution. Ginnie Mae securities are the only MBS that enjoys the full faith and credit guaranty of the U.S. government.

Fannie Mae and Freddie Mac are both federally chartered corporations. In September 2008, the Government-Sponsored Enterprises (GSEs) were placed under government conservatorship.

Ginnie Mae does not purchase mortgages, nor does it buy, sell or issue MBS or debt securities. Private lending institutions approved by Ginnie Mae issue the MBS for which Ginnie Mae provides a guarantee. Moreover, Ginnie Mae only securitizes federally-insured or guaranteed loans.

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