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Mortgage bailout 2.0 

And you thought the bailouts were over. Turns out, we're just getting started. In less than a year, Washington's Democratic leaders have set the country on a course to another multibillion-dollar bailout by doing exactly what they faulted former President Bush for allowing on his watch. It wrecked the housing market then. No telling what happens now.

Even as they attacked Republicans and the evil mortgage lenders and brokers -- some of whom actually were evil -- for wrecking the economy through reckless mortgage lending and creating the economic mess they inherited, the Democratic leadership was shifting the government's subprime economic activities over to the Federal Housing Authority and opening up shop there.

So far, they may have done as much as $54 billion worth of damage. On their watch, in just 10 months, the FHA has quadrupled the subprime-style lending it was doing in 2007. FHA mortgage loans now make up more than 20 percent of the country's loan market. Many of the loans are targeted to people with low to modest incomes and come with no formal credit-score requirements. Some 78 percent are to first-time homebuyers and 30 percent are minorities, the exact same groups politicians have faulted the private sector for targeting in the past. Some of these loans, depending on the state, can run up to $700,000. Many are borrowers who otherwise would be turned away by private sector lenders for credit or income reasons or because the private sector now requires down payments of 10 to 20 percent. FHA down payments go as low as 3.5 percent. Couple that with the $8,000 first-time buyers credit, which can be used toward a down payment after borrowers put down their 3.5 percent, and you have a disaster in the making.

"Because their initial investment is modest, critics believe, these borrowers have little incentive to stay in their homes if they are hit by a job loss or by another drop in home values," the Los Angeles Times reported. "Some lawmakers worry that the FHA may be doing its job too well -- enabling too many people with shaky finances to get loans, and in effect setting up a potential repeat of the housing bubble fueled in part by no-questions-asked subprime loans."

Last year, during election season, making loans to such people, which often destroyed them financially, was demonized, and the private lenders who did it were taken to the woodshed. Now it is all the rage on Capitol Hill -- as a way to bring back the housing market.

One problem. Too many of these borrowers are already defaulting on their FHA loans.

Last week, Edward J. Pinto and others tried to warn members of Congress. Pinto, a former Fannie Mae executive in the 1980s, testified before the House Financial Services Panel that the FHA will soon be more than $40 billion in the hole from trying to cover the losses driven by the defaults and will need a taxpayer bailout in the next 24 to 36 months. He said projections that everything is just fine -- similar to those Fannie Mae and Freddie Mac made before their $200 billion bailout -- aren't realistic.

Pinto didn't seem particularly optimistic that Congress would take action. He said, instead, that he testified so members of Congress "wouldn't be able to say that no one told them of the magnitude of impending losses."

And so continues the cycle of madness, some of it originating in America's newsrooms, which has driven the housing and economic crisis. For two decades, reporters have piled up awards for stories that demonized lenders for discriminating against those with low incomes or shaky credit by not making loans to them. Those stories were then followed by others demonizing these same lenders for preying on these borrowers by making loans to them after they defaulted.

Part of the problem here is that while it was apparently wrong for the private sector to make loans to people who can't afford them -- and also wrong not to -- Washington's elites are now looking to use these borrowers in a new way. They are desperately needed to prop up the real estate market.

Here's how. One proposed solution to the FHA's troubles is to raise the minimum down payment on FHA loans from 3.5 percent to 5 percent to encourage borrowers to stay in their homes. (Pinto recommended 10 percent.)

But new FHA Commissioner David H. Stevens said such a move would threaten the housing recovery, the Times reported.

That is, until enough borrowers default, further whacking out the housing market by temporarily inflating demand and denying buyers the opportunity to buy at true prices. Worse yet, as The Charlotte Observer reported this weekend, developers are actually beginning to pull permits for new home construction again in some areas, driven in part by the faux demand created by government loan interference and housing tax credits.

Meanwhile, as Forbes.com reported, seven million homes creep through the foreclosure process in the mid to late phases of delinquency across the country. That's an additional 18-month supply that has yet to hit the market.

Where will it all end? It depends on how much taxpayers are willing to pay.

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