Gov’t Agency Helps Risky Lenders Keep Lending

This is one of our editors' picks from our ongoing roundup of Investigations Elsewhere.

There have been countless news stories dissecting the current financial crisis and its origins, but today The Washington Post and the Center for Public Integrity shed light on a cog in the system that has received relatively little attention: the Government National Mortgage Association, otherwise known as Ginnie Mae.

As the Post/CPI investigation explains, the Federal Housing Administration guarantees mortgages to middle-income borrowers. Then Ginnie Mae steps in: 

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. (The Post also has a diagram illustrating the process.)

Just like the FHA, Ginnie Mae has seen its business balloon in the past two years. But unlike the FHA, which has had its problems, Ginnie Mae has largely avoided scrutiny.

According to the Post/CPI investigation, the agency has provided taxpayer backing to at least 37 mortgage companies "with a history of reckless lending, fines or other sanctions by state and federal regulators or civil lawsuits." That’s 12 percent of the 300 companies that Ginnie Mae says it has approved. This leaves taxpayers "on the hook for the troubled mortgages," according to the report, and helps fuel those firms’ risky lending to boot.

Ginnie Mae officials say that the agency has not yet needed taxpayer money to meet its obligations, and it doesn’t expect to. The Post/CPI report says that lenders with "spotty histories and poor financial health" have sold nearly $100 billion in loans securitized by Ginnie Mae in the past two years. The report does not calculate losses incurred by the agency, focusing instead on how it enables risky lenders to keep lending.

Ginnie Mae officials added that the average delinquency rate on all their loans is lower than that of the overall market, and that the agency carefully monitors the companies with which it works. But Joe Murin, the head of Ginnie Mae until recently, said that that the agency lacks the staffing capabilities to adequately track those lenders.