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Fannie, Fred and Sam and the subprime mess

Most of the folks both parties in Congress want to bail out of the widening home mortgage mess are not the poor minority Pedros and Letitias in the red lined neighborhoods of Cleveland you read about in the newspaper sob stories. They are very wealthy investors who were flipping houses in Sarasota, or hiding from the tax man in Colorado, or packaging jumbo loans or going after no doc and low doc loans in Chicago.

Here's an ad in one of my newest premiere magazines, Vertical Living.

A $1,000,000 loan with payments of only $2,528 per month
1.000% start rate / 7.516% APR
Fixed payment for 1st year
No prepayment penalties
Interest-only payments
Unlimited cash out-refinancing available

Adjust those numbers a little, and the appeal is the same as it was for all those low income buyers a year ago. How long before this buyer is asking you for help?

At this time, Fannie Mae and Freddie Mac* can't go that high, but oh, they are knocking, knocking at the door of Congress. Last Saturday the WSJ Hot Topic pointed out that FHA (Federal Housing Authority, a New Deal program that long ago outlived its usefulness) wants to suspend downpayment requirements to insure even zero-equity loans. :

It's a testament to the FHA's underwriting ineptitude that, even during the biggest housing boom in a generation, the agency's delinquency rate has somehow doubled over the last 10 years. In 2004, 2005 and 2006, the FHA's delinquency rate was 5 times higher than the rate on conventional prime mortgage loans, double the rate on loans with private, mortgage insurance, and even slightly high than the rate on subprime loans. . . Downpayment assistance program has suffered default rates as high as 20%. "Uncle Sam: Subprime Lender" 9-22-2007, WSJ

Freddie and Fannie
went up to Capitol Hill
to fawn for a bigger profit
Sticking you and me with the bill.

With help from our taxes
They'll package and resell,
a windfall for the banks and rich,
for the rest of us, economic hell.

Years ago the original aim
was to help the struggling poor.
Now they seek those jumbo loans--
Congress and Bush! Show them the door!

*Freddie Mac is the actual name of The Federal Home Loan Mortgage Corporation, created in 1970. It buys mortgages on the secondary market, pools them, and sells them as mortgage-backed securities to investors on the open market. Fannie Mae is the former Federal National Mortgage Association, which used to be a government agency, but is now a private corporation. In some sort of quasi-nightmare, these two are supposed to be "competition" for each other.