Ginnie Mae's growth gives fuel to risky lenders
Thursday, December 10, 2009
This report is a collaboration between the Center for Public Integrity and The Washington Post.
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.
"Ginnie is like an accelerant to a fire," said Anthony Sanders, professor of real estate finance at George Mason University.
More than a dozen lenders with Ginnie's endorsement have made loans that are now delinquent at rates far in excess of what regulators consider acceptable. And some of these lenders have been accused of misleading both borrowers and the government about these loans.
Created more than four decades ago to help expand homeownership, Ginnie Mae works in the guts of the financial system, offering a secondary layer of government insurance that helps make it easier for mortgage lenders to provide financing for home buyers. The first layer of government backing comes primarily from the Federal Housing Administration, which principally seeks to help first-time home buyers who have impaired credit or little money for down payments. The FHA insures the mortgages made to these borrowers, promising that the lender will ultimately be repaid if the borrower defaults. The FHA has the primary responsibility for monitoring the lenders.
Then Ginnie Mae enters the picture. Mortgage lenders often want to bundle the loans they've made into securities and sell them to investors. Ginnie Mae guarantees those securities, ensuring that investors continue to get their principal and interest without interruption if any of the loans go bad or lenders are otherwise unable to make payments to investors. This additional insurance makes the securities easy to sell, generating new cash for lending.
In the past year, nearly one in five new mortgages -- both good loans and bad -- were put into securities guaranteed by Ginnie Mae.
Ginnie Mae officials said that the average delinquency rate on all their loans is lower than that of the overall market, which has suffered mortgage defaults and foreclosures on a scale unseen since the Great Depression. These officials added that they have never needed taxpayer money to meet their obligations and have enough money in reserve to cover foreseeable losses.