A quick look at who is taking all the risk on new mortgages this year reveals some interesting facts. The chart below from the Fed shows some recent trends. Very few mortgage loans are kept on banks' balance sheets these days (Bank Portfolio) - and that fraction seems to be shrinking. The private securitization MBS market (Non-agency securitized) is also down to a trickle, though is a higher fraction than the balance sheet loans.
That leaves the US government to pick up the slack. It's not really a slack, it's the bulk of the new mortgage risk. The majority of these loans are of course extended through Fannie and Freddie. But there is a limit to how much these guys can take. The agencies are financing $5 trillion in U.S. mortgages already. It only takes a slightly higher than normal default rate to become under-capitalized on a $5 trillion balance sheet. The Treasury has so far injected over $100 billion of equity into the agencies to keep them afloat. That caps Fannie's and Freddie's ability to extend more credit.
To keep mortgages flowing however, the government has to pick up the rest directly by providing guarantees and sponsoring government insured MBS issuance. It does it through Ginnie Mae. That's why Ginnie Mae's proportion of newly originated mortgages has exploded.
Source: San Francisco Fed
So what exactly is Ginnie Mae? It's a government agency that actually does not directly take significant mortgage risk. Instead it simply guarantees timely payments on mortgages that are issued or guaranteed by other government agencies. The mortgage pools Ginnie Mae guarantees are:
1. Insured by the Federal Housing Administration,
2. Guaranteed by the Department of Veterans Affairs,
3. Issued or guaranteed by the Department of Agriculture's Rural Housing Service,
4. Issued or guaranteed by the Department of Housing and Urban Development's Office of Public and Indian Housing.
So why the "double guarantee"? Ginnie Mae effectively provides the bridge financing on payments between the time a mortgage loan becomes delinquent and the time when one of the 4 agencies (above) actually makes the investor whole on the guarantee. This way if a mortgage misses a payment, Ginnie Mae makes it immediately, and then collects from the other agencies later. And it does so with a pool of loans that serves as collateral for the Ginnie Mae guaranteed MBS bonds.
source: Ginnie Mae
A Ginnie Mae MBS is effectively a US Treasury security, but issued by a different agency. This shows just how the US government has turned the whole mortgage market into a machine that it now dominates, with a number of it's tentacles participating in different aspects. The Treasury supports the agencies by funding their equity. The Fed buys their debt and the mortgage securities they issue. And to the extent Fannie and Freddie can't handle more lending, the government steps in with four other organizations and wraps up the whole present with the Ginnie Mae guarantee.
SoberLook.com