Housing Bailout Chatter Gets Louder

Initially, mortgage problems centered on subprime lending, or those loans made to borrowers with a shaky credit history. But the fallout from the subprime collapse and associated loose lending standards are threatening to spill over.

A number of big mortgage firms have either gone the way of New Century, which went bankrupt, or shuttered portions of their mortgage lending operations. The lenders that are still standing have tightened up their lending practices. But that has had the effect of squeezing the market for jumbo loans, which don't conform to standards imposed by government-sponsored mortgage buyers such as Fannie Mae (FNM Quote) and Freddie Mac (FRE Quote)

Bove says a historical precedent exists for encouraging mortgage companies to originate loans that would be insured by the Federal Housing Administration and the Veterans Administration. The loans, he says, could be sold by Government National Mortgage Association and Fannie and Freddie.

The government "can rail against the lenders who made these questionable loans arguing that they followed imprudent policies," Bove writes. "It can argue that homeowners showed no discipline in taking out loans that they could not pay back.

Or, he adds, "it could tighten up a few laws and then conclude that whatever happened in the past in the mortgage industry happened in the past. Then it might unveil a massive money-losing bailout program to keep people in their homes.

"I am quite confident that this will happen," Bove concludes. "Rationality will prevail."