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.

It's no surprise that a report from the Wharton School released about a week ago estimated that the FHA would, at some point, be in need of a bailout in the range of $50 billion to $100 billion. It said the timing of the bailout depends on increases or decreases in home values. It also cautioned that the FHA is currently in violation of its capital reserve requirements.

All of this may be a surprise to HUD Secretary Shaun Donavan. On the agency's website, is says, "The agency has instituted reforms that have solidified the Federal Housing Administration's financial position and protected the taxpayer against risk, while still preserving FHA's mission of providing responsible access to homeownership." Maybe his confidence comes from the 2009 appointment of FHA's first ever chief risk officer, Robert Ryan. Prior to this role, Ryan worked for 26 years at Freddie Mac. Or maybe its Tozer's experience at National City Mortgage, a company that was acquired using TARP funds by PNC Financial Services in 2008.

President Obama may be surprised by this, too. One of the "We Can't Wait" initiatives makes it easier for underwater Fannie and Freddie mortgage holders to refinance. Unless these mortgage holders change their risk profiles, this initiative is likely to add to their record bailout of $169 billion.

The Wharton report discusses why the FHA has taken on these extraordinary levels of risk. It points to a decision by HUD to increase loan volume in order to cover rising foreclosures. In 2007, the FHA insured 4.1% of aggregate home purchases. In 2010, it was 19.1%. Who would quadruple their bet on the housing market in the past few years? Someone too big too fail. It makes you think the Occupy Wall Street cause should move to Occupy the White House.

With the government's mortgage meddling in such a mess, you have to wonder why the administration seems keen to meddle more. Last week, a senior White House official commenting on "We Can't Wait" said: The White House plans to take full advantage of "the sense of inequality in our economy. This is "the strongest current running through both our country and our politics right now."

Is bringing ownership to people at a high risk of foreclosure part of this focus on inequality? Does the White House think that social inequality has a stronger current than the economy? Maybe that's the reason the President can't get Republicans to follow his lead, and why his approval rating is under 50%. And maybe that's why the recovery in housing is looking bleaker rather than better.

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