The Debts of the Spenders: FHA - My Death Has Been Greatly Exaggerated

EDIT: Some sharp commentators have notified me of an important point - the credit risk on the Ginnie's is taken by the government. Not the purchasing banks. Than you, ghostfaceinvestah.

Some bears have raised the prospect of an imminent failure in the FHA's (Federal Housing Authority) funding and longer term viability. There were even calls that the FHA's loan problems stemming from delinquencies would soon rival or even exceed the problems in commercial real estate.

Such fears are clearly overblown. Like commercial real estate, FHA (which deals in residential mortgages for lower priced homes) loans are part of a targetted rescue package by federal authorities. But instead of a blatant TALF, TARP or any CMBS asset buying package(s), FHA loans are being rescued by none other than the very banks who underwrote the faulty mortgages in the first place!

The Wall Street Journal recently reported that many US banks have been loading up on Ginnie Mae mortgages which are in turn guaranteed by the FHA. Critics have pointed out that the FHA is effectively insolvent due to its large holdings of speculative real estate loans in some of the worst hit states like Nevada, California, Arizona, and Florida. But this income stream is a stealth bailout that effectively keeps refinancing flows steady - particularly important for those homeowners (does not apply to non-resident owners) who are underwater in their ARM loans and want to refinance at longer term fixed rates .

So, why would banks invest in an entity with such deep fundamental problems? Simple. Regulators have defined Ginnie Mae mortgages as zero risk in terms of meeting their capital adequacy ratios. This is in stark contrast to say holding Fannie/Freddie preferred stock which is a strategy that has ended up w/many a bank in FDIC receivership.

However, cynics also point out that this strategy is basically a form of regulatory arbitrage that does not address any of the fundamental points of insolvency (see my earlier posts on "Dollars cheaper to borrow than Yen"). Instead, this is merely a measure that postpones a bleak future.


http://online.wsj.com/article/SB125253192129897239.html