Falling mortgage rates are making Felix Salmon nervous

The Downside of Falling Mortgage Rates

I’m scared by the latest uptick in mortgage financing. Mortgage rates fell sharply yesterday, which is good news for people with good credit. But it might also be good news for people with bad credit — and very bad news for the US taxpayer.

Go read Business Week’s excellent investigation of subprime lenders who are now originating FHA-guaranteed loans, and you’ll see what I’m talking about. The only obstacle standing between these lenders and massive government-guaranteed riches, until now, was that mortgage spreads were still high, and that therefore mortgage rates weren’t following risk-free rates south. If that’s now changing, the US taxpayer might be funding — and, worse, guaranteeing — a brand-new subprime bubble.

More on falling rates — mostly cheerleading — in the LA TImes and the Sacramento Bee.

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