Alarm Bells

August/17/2009 18:08PM
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As the housing crisis was bubbling to the surface, I had a conversation with a young man who was a risk manager for a bank that went down in the mess. He spelled it all out for me. What was coming, when it was coming, and who would go first. I learned one thing from that experience, you aren’t going to get any alarms from conventional sources. The media is off duty. They are still on honeymoon with the new president. The responsible parties in Washington are the same ones that kept the housing crisis under wraps until it blew. Can you say Barney Frank, Chris Dodd, Charles Schumer, or Dick Durbin?

So,now I dig harder to anticipate problems to protect my future. There are a couple of areas that scare me right now. There was an obscure article in the WSJ that a top guy at Ginnie Mae was resigning. Remember, all the rats left the ship early at Freddie and Frannie. It was the parade of rats that started to get people’s attention. Remember the Enron evacuation? Skilling ran quickly.

Well, if you research Ginnie Mae you will find they are adding to debt. They added a record $43 billion in mortgage-backed securities in June. The president, Joe Murin announced they expect to top $1 trillion by the end of next year. Double the amount in 2007.

Where does Ginnie get it’s business? From the FHA. The FHA now insures $560 billion in mortgages, quadruple the amount in 2006. So, as the FHA takes on more risk, Ginnie Mae gets the job.

Certainly after the previous mortgage mess where sub primes were given to people without jobs, the FHA is not taking risks, right? Wrong. They back low down payment loans to buyers with poor credit and have little if any oversight. Whoa, isn’t this just the same old sub prime mortgage mess all over again?

According to the Inspector General the default rate is now 7%. That’s double the private sector default rate. The reserve fund for the FHA is now 3%, putting leverage to 33 to1, which is what Bear Stearns had.

Surely, the people in Washington with oversight responsibility are watching this. They are. They just approved keeping the max on mortgages at $729,750. The down payment is still 3.5%. Plus, the buyer can finance closing costs and use the homeowner tax credit to apply to costs.

What does this mean? If the housing and job markets don’t pick up soon, we taxpayers could be on the hook for another $50-60 billion in mortgage defaults from the FHA and Ginnie Mae. Plus, the post office needs $7 billion to get through the year. And, the FDIC says there are still 300 banks on the watch list that could go down this year. They will need more money too.

Hotel owners are walking away from their hotels in record numbers, leaving the creditors holding the bag. Distressed loans now cover 1,000 properties worth $16.8 billion. The delinquency rate is running at 4.75% but expected to go to 10-15% by year end. Why don’t we see more of the hotels closing? When the owner walks away, the lender finds an operating company to run it under a lease. This gives the lender some cash flow until it can be resold or foreclosed. These numbers don’t include casinos with hotels involved, which would add $8.6 billion in distressed loans to the total.

No doubt our government will step up and use our money to fix all these problems when they get so bad they can’t keep them under wraps. Then they will fix blame and have congressional hearings so they can be on TV and show you how they can grill a government employee.

It is inexcusable to let Ginnie Mae get in trouble on the heels of what just happened to Freddie and Fannie. We can’t let them off the hook on this one if it blows.

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