Fed Pushes Banks To Buy Ginnie Maes To Create Illusion Of Healthier Balance Sheets

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Pluto rules all forms of debt and Capricorn represents the government. Since Pluto entered Capricorn in 2008, the government has virtually taken over the mortgage market through purchasing mortgages securitized by Fannie Mae (FNM), Freddie Mac (FRE), and the FHA.

With Capricorn’s planetary ruler Saturn in Virgo, the government is advising banks to make their balance sheets appear healthier. Virgo is the accountant, and Saturn in Virgo tends to be cautious and conservative about the risk level of assets on a bank’s books. Saturn in Virgo reflects bank lending standards for consumers have become so risk adverse that banks will only issue mortgages that are backed by or could be sold to the government.

Uranus in Pisces since 2003 brought the boom and bust of the credit bubble, a combination of the Federal Reserve’s overly accommodative monetary policy and Wall Street’s financial alchemy. With Saturn in Virgo opposing Uranus in Pisces (2008-2010), government regulators are actually encouraging banks to buy Ginnie Mae securities as a new way to reduce banks total assets on a risk-weighted basis. Pisces represents illusions. Since Ginnie Mae bonds (explicitly guaranteed by the government) have a “risk weighting” of 0%, banks who own these bonds do not have to tie up capital against them. This compares to Fannie Mae and Freddie Mac’s 20% risk weighting and privately issued MBS that have risk weightings of at least 50%. Fannie and Freddie only carry an implicit guarantee and private MBS no government guarantee at all.

In “Banks Load Up on Mortgages, in New Way,” The Wall Street Journal reports that instead of using the money they received from the TARP program to jump start lending, some banks are using taxpayers money to buy Ginnie (FHA) securities to raise their total risk-based capital ratio above the 10% level that regulators require for a bank to be considered “well capitalized.” As of June 30, banks and thrifts were holding $113.5 billion of Ginnie securities, versus $41 billion year over year.

First State Bank of Union City Tennessee admits it used “a significant portion” of the $20 million the bank received from the TARP program to buy Ginnie securities. And the Journal reports that Federal Reserve officials encouraged Warren Bancorp, a small Michigan lender to buy millions of dollars of Ginnie securities as “the quickest and the least costly option” to address the bank’s depleted capital ratios due to rising loan losses.

There are two illusions at work here. One is that banks buying Ginnie Maes does not actually shrink banks balance sheets or remove troubled assets. And just because Ginnie Maes are backed 100% by the government does not mean they have no interest rate risk. The Journal article doesn’t mention the average term length banks are purchasing Ginnie securities, but when interest rates rise the value of the securities will fall if banks need to liquidate them.

Additionally, bank actions to buy government backed mortgage securities with TARP funds imply they are carrying a negative interest rate margin on these transactions. Remember that the TARP preferred stock pays the government a 5% dividend and the highest rates on these MBS securities are less than 3.5%.

Some large regional banks with excess low or no cost deposits have wisely parked them in relatively short-term (1 to 3 year) Fannie, Freddie and Ginnie bonds. The Fed has indirectly encouraged this behavior by implying rates will stay low until the recovery is proven, a long period into the future.

Pisces rules interest rates. As expansive Jupiter conjoins Uranus in Pisces in 2010, inflation could take a sharp and sudden spike up. As Jupiter (expansion), Saturn (contraction), and Uranus (future projections) change signs and shift into the fire and air elements during 2010, the Fed will need to raise rates much faster than they ever anticipated lest Bernanke enables yet another financial crisis.

Demand for Ginnie securities has kept FHA mortgages rates low, but the flight from Fannie and Freddie backed securities could raise mortgage rates for most borrowers unless the Fed continues to buy their securities. I wrote back in June that the two previous oppositions of Saturn and Uranus* (November 4, 2008 and February 5, 2009) brought about a new phase of the financial crisis that caused the stock market to sharply decline within one month of the opposition.

The next opposition of Saturn and Uranus will occur on September 15. The Sun represents leaders, and the day before the September 18 New Moon in Virgo, the Sun in Virgo will conjoin Saturn and oppose Uranus while Virgo's ruler Mercury re-enters Virgo. Meanwhile, Venus (banks) in Leo (stock market) opposes Neptune (illusion) in Uranus-ruled Aquarius the same day Saturn opposes Uranus.

This could mean the Fed and the other leaders of the financial regulatory agencies could face detailed questions and criticisms about their policies in the coming weeks ahead. Financial markets might be forced to remove the rose colored glasses and take a second look at the real state of health of the banks and the broader economy and adjust their valuations accordingly.

*The remaining oppositions of Saturn and Uranus will occur on April 26 and July 26, 2010.

Related Post: “Wall Street and the Consumer in Parallel Universes

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