Here’s what should have been a familiar scenario. The federal government wants to pressure lenders into offering mortgages to marginally-qualified borrowers. They offer a method to make the loans risk-free by bundling them into mortgage-backed securities (MBS) with the imprimatur of the US Treasury as a guarantee. When the money began rolling into the lenders, the lenders started amplifying the process by issuing loans to anyone breathing on a fairly regular basis, falsifying documents in order to rake in the dough — since defaults would no longer be their problem.
Is this a good description of the CRA-based housing bubble that ran for almost a decade before catastrophically collapsing in 2008? Yes — but it’s also a description of the collapse in over a billion dollars’ worth of MBSs from a lender this week, thanks to the same geniuses that brought us the financial meltdown:
The trouble signs surrounding Lend America had been building for years. A top executive was convicted of mortgage fraud but still helped run the company. Home loans made by its headquarters were defaulting at an extremely high rate. Federal prosecutors alleged in a civil suit that the company falsified loan documents and committed fraud.
Yet despite these red flags, a little-known federal agency continued giving its blessing to Lend America, allowing it to do business in the name of the U.S. government. The Government National Mortgage Association, known as Ginnie Mae, authorized the firm to bundle its mortgages into securities and sell them to investors around the world — all backed by U.S. taxpayer money.
Until last week, federal housing officials said that Lend America met requirements for participating in the program run by Ginnie Mae, an agency in the Department of Housing and Urban Development, and allowed the firm to sell more than $1 billion in mortgages via Ginnie Mae securities.
Lend America is hardly the only lender with a troubled record that Ginnie Mae has endorsed. The agency has provided taxpayer backing to at least 36 other mortgage companies with a history of reckless lending, fines or other sanctions by state and federal regulators or civil lawsuits, according to an analysis of government records, court documents and statistics in a HUD database.
Ginnie Mae’s ongoing relationship with these firms allows them to swap the home loans they’ve made for new cash so they can make more loans, which can then be traded for even more cash to make even more loans. Housing experts say this dynamic turbocharges the type of bad mortgage lending that first helped trigger the financial crisis that battered global markets over the past two years. And ultimately, taxpayers are on the hook for the troubled mortgages.
If anyone needed any evidence of the absolutely obtuse nature of statist interventionists, Ginnie Mae’s recreation of the housing crisis should provide it. At what point in this cycle should someone have said, “Hey, haven’t we done this before?” Was it when Ginnie Mae started guaranteeing MBSs for lenders, especially since there are around a trillion dollars’ worth of toxic MBSs still on the market? Was it when they started to pressure lenders into making marginal loans while foreclosure rates were already skyrocketing?
And now, watch out for the inevitable TARP program to rescue Ginnie Mae and its “guaranteed” MBSs, which will be used to bail out everything but its toxic assets. Barney Frank will harrumph that we’re not doing enough to help get people into housing, decrying the greed of the lenders, while enabling the greed and the excess of the next set by doing the same thing over again.
To paraphrase 300: This is madness — and it’s Washington DC.
Update: The Center for Public Integrity has a list of troubled lenders that Ginnie Mae has backed.