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Obama's Mortgage Plan Adds to Housing Mess

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- Finally, some sunshine in housing. On Nov. 9, Ginnie Mae, a government corporation within the U.S. Housing and Urban Development (HUD), reported record earnings of $1.2 billion for the fiscal year ending Sept. 30. Ginnie Mae said it financed nearly 60% of all U.S. home purchases during the year. Credit was given to the FHA's increasing role; it insured about half of Ginnie Mae's loans.

The CEO of Ginnie Mae, Ted Tozer, an Obama appointee didn't mention that Ginnie Mae has been picking up the high-risk-loan slack from Fannie Mae (FNM) and Freddie Mac (FRE). According to the National Association of Realtors (NAR), Federal Housing Administration (FHA) loan-to-values (LTVs) have been rising to unprecedented levels. LTVs over 97% were 17% in 1991. Between 2000 and 2008 it rose to 51%. In 2010 it reached 68.2%.

These high-LTV loans are risky but the risk in many cases is higher. The FHA allowed first-time homebuyers to use the $8,000 tax credit available in 2009 and 2010 for their down payment, so many buyers have invested nothing in their home purchases.

According to NAR, loans with "no skin in the game" account for 17% of FHA loans and 34% are in delinquency. A November report by the Wharton School noted that foreclosure rates on some types of risky loans, such as those with no skin in the game or those underwater is substantially higher (as much as 300% higher) than loans without these risk factors. However, loans are increasingly carrying both of these risk factors. According to the report, an average FHA-insured home purchased between Q2 2005 and Q2 2011 is underwater in the range of 5.8% to 19.5%.

Leaving aside the underwater factor, the leverage ratio in loans with 3% down is 33:1. When Lehman failed, it was 30.7:1. This level of risk is inconsistent with Tozer's Nov. 9 quote: "Our approach to risk-taking is conservative." He also said that Ginnie's approach "is helping to keep the housing market afloat." Till when?

Tozer also said, "Our model is something people don't really understand. It's the government having its cake and eating it, too." No kidding. Most businesses can't achieve a record level of net income on the back of a sister organization that looks to be lining up for a taxpayer bailout.
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