A big part of what caused the current economic mess was that the federal government, through Fannie Mae and Freddie Mac, encouraged risky lending, by a combination of cajoling big lenders, and their willingness to buy the high risk mortgages.
I have seen no evidence that they have fixed this mess--leaving us open to another disaster, once the economy recovers. Of course, this may be the goal--another disaster upon which the Democrats can ride the rescue. If the Democrats had an opposition party, they would fix this after gaining control of Congress. But the Democrats don't have an opposition party, so....
This November 22, 2009 New York Times article on CNBC isn't precisely the same disaster, but again, the federal government may get stuck holding the bag:
Investment funds are buying billions of dollars’ worth of home loans, discounted from the loans’ original value. Then, in what might seem an act of charity, the funds are helping homeowners by reducing the size of the loans.If the government agencies buying these mortgages had some adult supervision, this probably wouldn't be so worrisome.
But as part of these deals, the mortgages are being refinanced through lenders that work with government agencies like the Federal Housing Administration. This enables the funds to pocket sizable profits by reselling new, government-insured loans to other federal agencies, which then bundle the mortgages into securities for sale to investors.
While homeowners save money, the arrangement shifts nearly all the risk for the loans to the federal government — and, ultimately, taxpayers — at a time when Americans are falling behind on their mortgage payments in record numbers.
For instance, a fund might offer to pay $40 million for a $100 million block of mortgages from a bank in distress. Then the fund could arrange to have some of those loans refinanced into mortgages backed by an agency like the F.H.A. and then sold to an agency like Ginnie Mae. The trick is to persuade the homeowners to refinance those mortgages, by offering to reduce the amounts the homeowners owe.
The profit comes when the refinancings reach more than the $40 million that the fund paid for the block of loans.
The strategy has created an unusual alliance between Wall Street funds that specialize in troubled investments — the industry calls them “vulture” funds — and American homeowners.
But the transactions also add to the potential burden on government agencies, particularly the F.H.A., which has lately taken on an outsize role in the housing market and, some fear, may eventually need to be bailed out at taxpayer expense.