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Meet your new subprime lender 

There was great joy recently in Charlotte as builders began pulling permits again to build new single-family homes in September and there was an uptick in the sale of low-end housing stock. Much of it, the Charlotte Observer reported last week, is being driven by first-time homebuyers looking for homes that cost less than $130,000 and paying for them with the help of the $8,000 homebuyer's tax credit.

God help us ... and them.

Last time this happened, two years ago, it resulted in an Observer series on nearly new, partially abandoned suburban neighborhoods riddled with crime and other maintenance issues that are still costing the city millions. At the time, there was outrage that families who couldn't afford houses in these neighborhoods were preyed upon by subprime lenders who had made them mortgage loans only to find themselves out on the streets after foreclosure.

Most of those private market subprime lenders are gone. In their place stands the federal government. It is now the nation's largest subprime lender, and it is expanding its portfolio of risky loans each month with the tax credit, which Congress plans to continue at a cost of $1 billion a month, as extra inducement to buy.

Zerohedge.com's Tyler Durden put it best last week: "With the U.S. government now having taken over the functions of such pristine subprime lenders as New Century, with the provision that it not only is not checking borrowers' credit scores, income potential, or other 'facts' that the mortgage lenders at least pretended to care about, but also giving away massive incentives to promote housing bubble V2, it was only a matter of time before the taxpayer's balance sheet would start looking like (former Countrywide Financial CEO) Angelo Mozilo's wet dream."

Given that, last week was a supremely ironic week one. The Obama administration's paymaster, Kenneth Feinberg, announced cuts in executive pay to punish the corporate risk-taking that led to the real estate bubble and the economic crisis. The Federal Reserve announced that its bureaucrats would be setting the compensation plans for an additional 5,000 lending institutions it regulates -- companies that did not take bailout funds -- all the way down to the loan-officer level. Again, the purpose is to punish the risk-taking that led to faulty securities packed with risky subprime loans.

While they are at it, Feinberg and the Federal Reserve bureaucrats should bring their 95-percent pay cuts to the Treasury, Congress and the White House, the Federal Housing Authority, Fannie Mae and Freddie Mac.

The very same out-of-control risk-taking the federal government is now punishing Wall Street for has merely moved to a new government address. The federal government is plunging taxpayers further and further underwater each month.

As President Obama lectured Wall Street about greed this week, the administration announced a new plan to "increase resources" for low- and middle-income borrowers to buy homes. The goal? To make several hundred thousand mortgage loans to first-time homebuyers this year, though there would be no limit on how many loans it would back. This would be paid for -- are you ready for this -- with a new bond purchase program. ABC News reported that under the new bond program, the Treasury Department will purchase securities of government-sponsored mortgage giants Fannie Mae and Freddie Mac, backed by these new mortgage revenue bonds.

That's almost exactly what got our economy into this mess, except now the government seems to want a monopoly on it.

Now for the punchline. Last week, as President Obama moralized about mopping up other people's messes, Freddie Mac released its September Monthly Volume Summary; its loan defaults set a new annualized record, hitting a staggering 7.3 percent.

What a great time to expand lending supported by Freddie to more of America's riskiest borrowers, those who can't get loans from the private sector for good reasons. Why didn't the Bush and Clinton administrations and Congress think of that before?

"Today, Freddie Mac released its September Monthly Volume Summary and, as expected, it is beginning to look like the subprime debacle is among us, only this time all of America is on the hook," Durden wrote.

That's on top of the mess the Federal Housing Authority is in the process of creating. In 2009, under the watch of the Obama administration and Congress and while they claimed to be cleaning up Bush's mess, the Federal Housing Authority quadrupled its market share to 20 percent of the mortgage market with government-backed loans made without any minimum credit score to low- and moderate-income homebuyers. (Local FHA shops are lending to those with scores as low as 560.)

According to testimony at a congressional hearing last month, the FHA is now about $40 billion in the hole and will need a bailout in the next year to 36 months as -- no surprise here -- loan default rates at FHA have begun to skyrocket. The FHA, too, is in the process of expanding its lending activities.

So get ready to dig a little deeper into your wallet to clean up the next mess. It is going to take a really big mop.

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