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Thursday, December 10, 2009 3:16 AM

Taxpayers On The Hook For Ginnie Mae's Rampant Growth

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The Center for Public Integrity and The Washington Post collaborated nicely on a report detailing problems at Ginnie Mae.

Please consider Mortgage agency's growth gives fuel to risky lenders.

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 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.

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 is like an accelerant to a fire," said Anthony Sanders, professor of real estate finance at George Mason University.

HUD Inspector General Kenneth Donohue said Ginnie Mae is too accommodating of problem lenders, adding that the agency has put its highest priority on ensuring that money is pumped into the mortgage market.

"Ginnie Mae is in the business of trying to bring in business," he said.

Lenders with spotty histories and poor financial health have sold nearly $100 billion in loans packaged into Ginnie Mae-guaranteed securities in the past two years, according to calculations based on data provided by Inside Mortgage Finance, a trade publication.

Sixteen mortgage lenders endorsed by Ginnie Mae have been cited by various federal regulators for unsafe banking practices, insufficient capital or other violations. Thirteen firms have been fined, sanctioned or ordered by HUD auditors to cover the cost of bad loans. Eight firms have FHA loan portfolios that are defaulting at double the rate of their principal competitors, which can be grounds for suspension from the FHA program. Another eight companies have FHA default rates more than 50 percent higher than the average in their area.

In November, Ginnie Mae's outside auditor reported a "significant deficiency" in Ginnie's internal controls: The agency could not adequately track whether loans sold to investors had been insured by the FHA and therefore met government requirements. The auditors noted they first identified the problem in 2007.

When Lend America, based on Long Island, N.Y., was approved as a Ginnie Mae issuer in June 2008, there were already reasons for caution. HUD's database shows that nine months before that approval was granted, FHA loans made by one of the firm's branches had a default rate far higher than is deemed acceptable by the FHA. The company's chief business strategist, Michael Ashley, had been convicted of fraud, including for falsifying loan applications, and been subject to multiple investigations into his business practices.

Yet for the past 18 months, nearly all of Lend America's 6,500 new loans have been turned into Ginnie Mae securities, giving the company additional cash flow and putting taxpayers at risk. A spokesman for Lend America said neither the company nor Ashley would respond to questions for this report.

Ginnie Mae has stood on the sidelines as the Justice Department -- and, at times, HUD itself -- tried to crack down on the company's business practices. Last week, federal officials removed Lend America from the FHA program altogether, shutting down the firm's government-backed lending. That triggered an immediate suspension of the company by Ginnie Mae.
Ginnie will argue that it has not needed a taxpayer bailout yet. However, the key word is "yet". It boggles the mind that it would keep doing business with places like Lend America until external forces shut Lend America down.

There is much more in the article about Lend America and several other companies not mentioned in the above snips.

I say the same thing about Ginnie Mae that I have said about Fannie Mae and Freddie Mac: The first thing any regulator in his right mind would do would be to shut them all down.

In case you missed the key problem in the article here it is: "Ginnie Mae is in the business of trying to bring in business".

Government has no business competing against the private sector for business. Unfortunately, Fannie, Freddie, and Ginnie are the only game in town when it comes to mortgages given that banks in general are flat busted, lacking in capital.

Sadly, Obama has all but guaranteed more government intrusion into our lives, with predictable results. If you are looking for proof, please see Stimulus Checkup - 100 Ridiculous Projects Funded by the American Recovery Act

To that list you can safely add up and coming bailouts at Ginnie Mae, Fannie Mae, and Freddie Mac, along with higher taxes at the state, local, and federal level to pay for all the stimulus spending that has produced negative benefits while doing nothing to cure the basic problem: massive consumer debt that cannot possibly be serviced.

Government is the mortgage lender of last resort, the job provider of last resort, and the auto manufacturer of last resort, places government has no business being at all. Government spending has gone wild and all we have to show for it is trillions of dollars worth of debt, 10% unemployment, troops in 150 countries, two wars, and 35 million on food stamps.

Hey, what the heck. Wall Street was bailed out, who cares about Main Street?

Mike "Mish" Shedlock
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