Did Government Create Mortgage Securities Mess? Is It about To Repeat Its Mistake?

Another Deja Vu Nightmare from Schumer, HUD, and the rest of the Federal Government

Who cares about the Hollywood writer's strike when we have the daily farce of government bailout policy?

The US federal Housing and Urban Development (HUD) website boasts that it was the federal government which invented and pushed mortgage securities, a tool that some analysts and pundits now accuse of causing/enabling the housing bubble crash, subprime mortgage mess, foreclosures epidemic, institutional financial losses, teetering stock market, and global credit crisis:

"[HUD's] Ginnie Mae is a wholly owned government corporation within the U.S. Department of Housing and Urban Development. Ginnie Mae pioneered the mortgage-backed security (MBS), issuing the very first security in 1970. An MBS enables a mortgage lender to aggregate and sell mortgage loans as a security to investors. Ginnie Mae securities carry the full faith and credit guaranty of the United States government, which means that, even in difficult times, an investment in Ginnie Mae is one of the safest an investor can make" (HUD).

The "safety" means that you the US taxpayer are liable for all the risk, so you can pay a debt-defaulter's mortgage to make sure that a Wall Streeter does not lose money. That guarantee is quite a blessing if you spend your days trying to figure out ways to pay other people's mortgages and spend your nights worrying about Wall Streeters losing money.

Take a moment to absorb the irony of all the politicians now decrying mortgage securities when politicians created and pushed mortgage securities.

Senator Charles E. "Chuck" Schumer (D-NY) complained to the Federal Reserve, Treasury, HUD, FDIC, SEC, and others:

"Over the past several decades, innovations in the mortgage markets have made it much more difficult for too many homeowners to refinance their loans when they need to. Furthermore, the prevalence of unscrupulous lending fueled by the increased appetite for subprime mortgage securitizations has resulted in a growing number of homeowners facing payment shocks as rates reset that could cause them to lose their homes. In order for them to keep their homes, their loans must be modified. Twenty years ago, most of these borrowers could go to the bank that held their mortgage and seek assistance. Today, with their loans sliced and diced into many pieces held by a variety of unaffiliated market participants, there is no one on the scene to help beleaguered homeowners do loan workouts" (Schumer press release, 8/22/07).

Schumer's new "solution" is to put the same fox in charge of the same henhouse again (Schumer's press release then referred to him in the third person):

"Schumer has supported the empowering of non-profit agencies, sanctioned by the Department of Housing and Urban Development, to play this role of facilitator" (Schumer press release, 8/22/07).

Schumer concluded his solution with a call for more, untested, government tinkering in the housing markets:

"The reality of today’s mortgage market calls for new and creative thinking by the regulators" (Schumer press release, 8/22/07).

HUD's response to the flood of bad mortgage securities is to announce its creation of yet another mortgage security:

"The new security will be a multiple-issuer pool type under the Ginnie Mae II Mortgage-Backed Securities Program, and will be available for pool issuances beginning December 1, 2007" (HUD 10/16/07 press release).

So the timeline is:

• Government decides it must invent new creative financing for housing.
• Government creates Mortgage Backed Securities (MBS) to divide/resell the debt/risk.
• Government accuses Mortgage Backed Securities (MBS) divided/resold debt/risk of causing housing disaster.
• Government decides it must invent new creative financing for housing.
• Government creates new Mortgage Backed Securities (MBS) to divide/resell the debt/risk.

You can't make this stuff up.