SeriousBull

Fannie & Freddie, but what about Sister Ginnie?

Tags: Credit crisis + Ginnie Mae + GNMA + investing + sub prime

Fannie Mae reported a loss of $3.6 Billion on Wednesday for the fourth quarter of last year (2007). Freddie Mac, its smaller government sponsored brother today reported a $2.5 Billion loss for the same period. If not for a

favorable change made in its accounting, Freddie Mac said it would’ve lost $3.7 Billion. A significant percentage of the losses incurred in both publicly traded companies reportedly were from losses in interest rate swaps used to hedge against adverse changes in interest rates. So one might conclude that the mortgage companies’ hedging and risk management expertise is sorely lacking as their bets just didn’t work out. Apparently, the brother’s management believed that interest rates were going to rise despite the fact that their portfolios were experiencing greater defaults and all around them housing foreclosures were rampant. Luckily these corporations two are private, non-governmental agencies with public shareholders to take the otherwise the US Government deficits would likely skyrocket.

But what about sister, Ginnie Mae? Ginnie Mae by contrast is a government agency and its losses are direct obligations of the US taxpayer.  Since Ginnie Mae’s mission is to create a secondary market for moderate income and sub-prime loans by guaranteeing mortgages, what are Ginnie Mae’s losses to date? Why is it that no government official, no official from Treasury, no spokesman from the Executive branch, no Member of Congress has commented publicly about what’s going on with Ginnie Mae? Why is it that Fannie Mae and Freddie Mac report disastrous earnings and nobody in the traditional news media mentions Ginnie Mae?  SB finds this completely beyond the realm of probability. Indeed it is not possible that no reporters, nor news media editors in the US have thought about Ginnie Mae defaults, so why have there been no articles, no public disclosure in the press? 

Using Google to search for “Ginnie Mae loan problems” and “Ginnie Mae defaults” brings up one article published by the New York Times from 1989. This article detailed that “lax and inadequate supervision, combined with reliance on private parties to regulate their own extensions of credit, has produced billions of dollars of losses for the Government.”  Congressional investigations ensued and supposedly, Ginnie Mae was fixed. But there are no articles today! Could it be that Ginnie Mae has escaped this credit crisis? Nonsense. Ginnie Mae is deeply in the thick of it. Sub-prime loans are what it guarantees. We need the same disclosure from Government that Government requires from the private sector. But not to worry, it will come, because the US taxpayer will pick up the tab for all of Ginnie Mae losses. Prolonging disclosure is a bad strategy. It assures there will be no V-shaped recovery. It only prolongs the credit crisis into a wide U-shaped contraction. Until this news hits, until the inflation, leverage and excesses have been wrenched out of the market, astute investors will wait for the other shoe to drop–after all they know about Ginnie Mae; their not as stupid as the government would hope.

February 28, 2008 - Economy, Markets, Politics