I’ve been reviewing in depth the non-banking mortgage originating industry, FHA’s mortgage insurance funds and Ginnie Mae’s mortgage backed security insurance programs.
Since the Financial crisis there has been a considerable increase in loans orignated from non-banking mortgage entities, insured by the FHA and securitized by Ginnie Mae into mortgage backed securities. Around the time of the financial crisis FHA insured 3% of the mortgages originated in the country and as of November 2017 that number totals 15% with an approximate value of 1.2 trillion. FHA currently only has 30 billion in reserves to handle claims from mortgage issuers for losses related to foreclosures. With such a monteary increase in total liabilities from the insurance fund, which is continuing to grow with record breaking housing prices, how would the FHA not need a congressional bailout during a significant downturn in the economy due to increased foreclosures?
On top of this, according to FHA’s 2018 Q1 report to congress, borrower financial health is down. Deliquency rates have increased, new borrower’s credit scores on average are down (10.3% credit score under 619!), debt to income continuing to rise (42.6%) and down payment assistance continues to go up (less skin the in game for borrowers). In a sense, these aren’t ninja loans, but sub-prime lending is back under a new name.
On top of this, Ginnie Mae insures the mortgage backed securities assuming any losses will be remote. Ginnie Mae assumes the losses will be taken first by the borrower’s equity and then by FHA’s insurance program. If during a significant downturn, Ginnie Mae is on the hook to insure losses and services loans to the tune of 1.9 trillion with 31 billion in reserves. Again, how would there not be a government bailout?
Essentially, it appears that banks have scaled bank their mortgage originating services to be filled in by non-bank entities. The risk appears to be pushed onto the government and tax payers. What affect would a significant loss such as 250 billion in realized liabilities have on the stock market and bonds? How would the REIT and Financial sectors be impacted and what exposure would they have? Would a bailout be politically untenable, resulting in a non-banking mortgage liquidity crisis as described in www.brookings.edu/wp-content/uploads/2018/03/5_kimetal.pdf.