It's like deja vu all over again (UPDATED)

"You have to ask the question: Have we figured out what got us here in the first place and are we going to make sure we don't replicate that failed system?"

That from Scott Garrett (R-N.J.) on the high amount of delinquent and foreclosed mortgages on Fannie Mae’s books currently.

In the wake of the mortgage meltdown, the Federal Housing Administration has emerged as a pillar of the still wobbly housing market -- providing vital insurance that enables borrowers to qualify for loans with as little as 3.5% down.

This year alone the agency has backed nearly 2 million mortgages worth at least $328 billion. It insured 21.5% of all new mortgages last year, up from fewer than 6% in 2007.

Some lawmakers, however, 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.

We don’t know what would lead people to that conclusion especially when the current number of FHA loans that are delinquent or in foreclosure climbed to nearly 8% at the end of June from about 5.5% in early 2006 and Fannie is permitting people to plunk down as little as 3.5% down, no questions asked.

According to some, the wet blanket party just needs to pipe down.

One proposed solution to the agency's troubles, backed by Garrett and others, is to raise the minimum down payment on FHA loans to 5%. Backers believe that will encourage borrowers to stay in their homes and not let them fall into foreclosure.

But new FHA Commissioner David H. Stevens said such a move could threaten the nascent housing recovery. A person looking to buy a $300,000 house, for instance, would have to raise an additional $4,500 for the down payment.

"All that's going to do is retard recovery," he said.

Raise an additional $4,500 for the down? That’s criminal.

Though were certain that while the term “retard” is useful here it was not used in its proper context.

We suppose the best thing that could be said about this program is that it appears to be only slightly less dreadful than say, Cash for Clunkers only in that we are not burning down existing homes to create a demand for new ones. The government is creating demand instead by pumping tax dollars into a scheme whereby homeowners and potential homeowners have very little skin in the game and thus little incentive to stay up with their mortgage payments.

The political class and perhaps much of America does not yet appear ready to face the prospects of a long slow recovery from the housing collapse that will wring-out the excesses and bad actors opting instead for serious flirtation with another housing crash.

What is it that we keep hearing about a double-dip recession?


(UPDATE #1): And the hits just keep coming…

The Federal Housing Administration, which insures mortgages with low down payments, may require a U.S. bailout because it has $54 billion more in losses than it can withstand, a former Fannie Mae executive said.

“It appears destined for a taxpayer bailout in the next 24 to 36 months,” consultant Edward Pinto said in testimony prepared for a House committee hearing in Washington today. Pinto was the chief credit officer from 1987 to 1989 for Fannie Mae, the mortgage-finance company that is now government-run.

The FHA program’s volumes have quadrupled since 2006 as private lenders and insurers pulled back amid the U.S. housing slump, Pinto said. The jump has left the agency backing risky loans and exposed to fraud in a “market where prices have yet to stabilize,” he said.

Backing risky loans? At 5 percent down and no questions asked? We think you’re racist for thinking you just can't throw around tax payer money like free candy.