SubPrime The Sequel

The old cliché says that those who don’t learn from history are doomed to repeat it. The Obama administration is among those who don’t learn from history because it is preparing a repeat of the subprime mortgage debacle.
 The White House is about to give state and local housing agencies $35 billion to finance low interest mortgages for low income people who have a hard time getting housing loans, The Wall Street Journal reports. A plan soon to be submitted to President Obama and Treasury Secretary Timothy Geithner would have Uncle Sam issue $20 billion worth of bonds to finance the mortgages issued by local and state housing agencies. 
To make matters worse at least some of these bonds would be issued through federal mortgage giants Freddie Mac and Fannie Mae which are already in financial trouble because of the Subprime Mortgage Crisis. The plan includes another $15 billion in federal funds but the September 28, 2009 WSJ article by Deborah Solomon doesn’t say where that money is coming from.
For those of you who don’t remember Freddie Mac is the agency that lost $2 billion in 2007 but still managed to pay $210 in retention bonuses to its employees in 2008. Things at Freddie Mac are so bad that its acting chief financial officer David Kellerman killed himself on April 21. The Wall Street Journal reported that the agency’s accounting practices and governance are being investigated by the US Attorney’s Office for the Eastern District of Virginia. Yet President Obama is planning to give $35 billion to these guys. 
 This scheme is an effort to artificially prop up real estate prices and housing sales by having the local and state housing agencies take the place of discredited and bankrupt mortgage lenders like Washington Mutual. There are several reasons why the administration would want to do this, foreign investors have poured trillions into Freddie Mac and Fannie Mae which have been taking a beating in the financial market. The collapse of these agencies stocks could make the economy worse.
 It must be noted that a number of politically powerful special interests including real estate developers, real estate agents and contractors profit from cheap mortgages. Now that the subprime bubble has burst these predatory interests are looking to Uncle Sucker for a new payday. Turning local and state housing agencies into ATMs for these interests could generate a lot of campaign donations for Democratic politicians.
 The side effects of this plan could be catastrophic it could bankrupt the state and local housing agencies which have managed to avoid the subprime pitfall. These agencies help many first time homeowners and low income people get mortgages. The short sighted short term effort to increase these agencies’ funding could push these people out of the housing market.
 Publicity of this plan could destroy Freddie Mac and Fannie Mae’s reputation and cause foreign investors to pull out. Especially if they think the plan is a bailout and those agencies are about to crash. The collapse of these agencies could devastate the mortgage industry and cause a complete collapse in housing prices in the United States. 
 It goes without saying that further federal loan handouts will drive up the federal budget deficit and increase the money supply. Two moves that are bound to create inflation by lowering the value of the dollar. Just a few more of these cheap credit schemes could destroy the dollar and completely undermine the US economy. 
 There seems to some opposition to this scheme in Congress but sadly enough the money Obama could use for this was appropriated in the misnamed 2008 Housing and Economic Recovery Act. A better name for this would the Act for the Destruction of the Housing Market and the Economy.

http://online.wsj.com/article/SB125409967771945213.html?mod=WSJ_hps_LEFTWhatsNews

http://blogs.wsj.com/deals/2009/04/22/freddie-mac-tragedy-follows-trouble/

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