Has The Federal Government Gone Subprime?

Uncle Sam sure has a lot of explaining to do.

He's spent years pumping untold billions into the housing market, only to see home prices and sales sink again.

Now he's getting hit by critics on the right and now the left, who contend our wayward uncle, in his desperation to keep the real estate market from collapsing completely, has made the ultimate down market move.

He's gone subprime, according to a growing number of critics on both sides of the political spectrum, replacing the high-cost mortgage dealers of old on the neighborhood stoop.

My guess is that readers of this blog are more familiar with the right's critique of the federal government's takeover of the mortgage market. In order to keep the mortgage market alive, Fannie Mae, Freddie Mac and the FHA let through a lot of questionable borrowers over the past two years, only to reap a whirlwind of bad loans.

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FHA Loans: The New Subprime

Coming financial reform legislation misses the point if it doesn't address the federal government's growing dominance of the mortgage market because the United States is already being set up for another bubble.
Uncle Sam's best role is to set the parameters for the industry, including sane underwriting requirements for banks and non-bank lenders, along with other rules to prevent abusive lending, while slowly weaning the mortgage market off the programs that have helped feed the boom-and-bust cycle.

But Senator Chris Dodd's "Restoring American Financial Stability" bill does nothing of the sort. In fact, the bill doesn't address the future of Fannie Mae(FNM) and Freddie Mac (FRE), or the explosion of mortgages guaranteed by the Federal Housing Administration (FHA) at all.

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