Don't Open the Door

The Wall Street Journal gave a scathing editorial. It is unusual. The reason I say this is because, the WSJ has mostly been a cheerleader over the last two years, despite tremendous writedowns among major corporations. These writedowns have occurred in one area, the investments with anything involving housing. More specifically, the debt associated with housing. Already passed by the House, a new bill will raise the loan limits, and reduce downpayments, on loans issued by the FHA that would classify for subprime.

Congress, in its place of eminence, certainly believes it can defy logic, gravity and the sun rising in the east if it passes this bill.

The WSJ begins "Well, this certainly is embarrassing. The Federal Housing Administration – the very agency the Bush Administration and Congress trumpet as the solution to the mortgage crisis – has announced that it suffered a $4.6 billion loss last year." The bill, quickly making it's way through the house and senate, will increase the loan limits, and bring upwards of $300 Billion new subprime and Alt-A loans into the FHA portfolio.

GNMA, widely known as Ginnie Mae, is the conduit for all FHA and VA financing. It is the only GSE to have explicit backing of the US Government. If there are any losses, taxpayer money is used to replace those losses.

I believe there will be significant losses with this new batch of loans. So does the WSJ.

The larger question is this - Why should the banks that originate these loans, and make the profit on them, be allowed to unload them, and leave the American taxpayer to pay the bill?

From WSJ-

"The Government Accountability Office finds that default rates among low or zero downpayment FHA loans are about three times higher than on conventional loans. They go Bust." " Mr. Frank's House bill would allow the FHA to guarantee a loan up to 125% of the average home price in any area."

What??? Into a declining market?

Believe this; if this $300 Billion gets in the door, there is a lot more coming up the sidewalk, wanting to come in for the party; From WSJ -

"The most reckless provision now on the Senate floor would allow the FHA to take over risky subprime loans from private banks. When FHA Commissioner Brian Montgomery announced the agency's losses last week, he warned that Congress's subprime loan bailout could plunge FHA deeper into the red. Senate Banking staffers tell us that lenders have all but admitted that, if the bailout becomes law, they will dump their worst loans onto the FHA."

How high do you want your taxes to be? How low do you want your property value to drop? It is inevitable that your children, and probably grandchildren will pay for this. Wanna make it your great-grandchildren?

The only way this can work is if property values come back up to where they were in Jan. 2006, and come back very soon.

I don't think that can happen in the next few months, do you?

In fact, commercial property is just beginning to follow the residential slide. The drag on our economy this creates will spell the end for many regional banks. This is not my opinion, it is the FDIC's opinion.

More taxpayer money to cover the losses of the speculative real estate boom. Congress should not use taxpayer money to back the excesses of speculation. Keeping people in their houses currently paying something every month is wise. To increase the number of people who will go underwater with their mortgages.... well, that is another thing.