This headline from FHA today. The full report is here.



This is incredibly flawed policy. The Government mortgage Agencies have created a window whereby borrowers can automatically get upside down on a loan. This is reckless lending and should not be permitted. This is much worse than any lending standard that existed in the go-go sub prime era. There is a mountain of evidence from academia, the government Agencies themselves and the mortgage insurance industry (MICA) that default rates explode when LTV’s exceed 100%. Even good borrowers lose the incentive to pay back a loan.

In his statement FHFA Director Lockhart said, “The higher LTV refinancing will allow more homeowners to strengthen their finances.” That simply is not true. Borrowing more than your assets are worth is a death trap. Have the events of the past 24 months not proven that sufficiently?

It was galling to see Treasury Secretary Geithner together with Mr. Lockhart as this announcement was made. How many times has Mr. Geithner gone to Congress and spoken on the need for an end to reckless lending. He has been finger pointing at the banks for six months. He has turned half the country against Wall Street by repeatedly accusing them of predatory and unsafe lending. How he can stand there today with a plan to make bad loans with the peoples money is beyond my understanding.

Where are the other voices on this? Where are Summers, Volker and Goolsbee? How can Ben Bernake permit this? FHFA is the regulator of the Agencies that is supposed to be protecting the taxpayers from further risks to these behemoths. The regulator should not permit them to make unsafe loans. In this absurd theater the Regulator is encouraging the lenders to make bad loans.

This plan covers only existing mortgagees of the Agencies. If you have your mortgage with the local S&L you are out of luck. The Agencies own 56% of all the mortgages outstanding. This means that 20 million borrowers will not have the opportunity to get themselves hopelessly in debt. In the long run that will be a blessing. In the short run it is patently unfair. The private mortgage lenders will certainly not offer these silly mortgages. If they did the Controller of the Currency would shut them down.

I would not be surprised if news of this development does not impact the currency markets. We are already viewed as a society that is hopelessly over leveraged. That the largest single provider of mortgages in the world is committing itself to a program of reckless lending is unlikely to instill much confidence. It will be very hard to convince the Chinese that their investments are ‘safe’ when we are doing such stupid things with their money. American taxpayers have their feet to the fire of the Agencies. We are going to get burned and there is nothing we can do about it. Those that can should vote with their feet.

I have followed most of the players in this story for some time. I am certain that if asked privately they would acknowledge that this is a dangerous step that exposes the People to significant losses. They know that over leveraging consumers will haunt them. They know that they run the risk of undermining the entire financial market. Each of them is turning their back on what is the ‘right thing to do’. They are doing it because it is expedient. They want to provide an additional hidden stimulus to the economy. This will achieve that. It is what every Administration has done for the past 16 years. Abuse Fannie and Freddie to achieve a domestic objective. Pay the price later.

This time the market may have something to say about this bad plan.