Senate Passes Taxpayer Subprime Bailout

No surprises today. The Senate, nearly unanimously, passed a bill that would allow the Federal Housing Administration to insure bigger mortgages with lower down payments. Now, an office charged with helping working families get reasonable loans could, for political expedience, be used to provide the guarantees on McMansions worth more than $400,000, with only 1.5% in a down payment. That's right, people who can't afford the loans they've got would, if this bill becomes law, be able to stick their default risk on you and me -- with only half the down payment previously required.

Why does this matter? Because, contrary to popular belief, the FHA's loan guarantees do not result in a net positive to the government. Fees imposed on borrowers don't pay the full price of the program. Instead, FHA guarantees result in a net negative. The Congressional Budget Office made that clear in this 2006 letter. It is only through creative accounting that the FHA appears to pay for itself. It wasn't always this way, apparently. Back in 2003, the Congressional Budget Office warned that the barely positive balance wasn't quite what it seemed. And this was before home prices were inflated by artificially low loans.

Of course, this loan guarantee program will have plenty of backers besides homeowners who borrowed more than they could afford. Banks involved in rotting mortgage-backed securities like Citigroup (NYSE: C  ) , Goldman Sachs (NYSE: GS  ) , and Bear Stearns (NYSE: BSC  ) ought to love it. They stand to see an increase in paid-off homes inhabiting their toxic CDOs. Sure it's a prepayment rather than a stream of income, but hey, that's better than getting an illiquid, foreclosed asset selling for 50%-70% of its original value. Homebuilders like Hovnanian Enterprises (NYSE: HOV  ) , Ryland Homes (NYSE: RYL  ) , and D.R. Horton (NYSE: DHI  ) should like this bill, too. Anything that can shore up lending to marginal borrowers and keep the foreclosures off the market could help them hold the line on prices -- at least a little.

It won't be enough to save any of them from the meltdown of mortgage-backed securities, but it couldn't hurt, especially when you and I, dear Fool, will be footing the bill.