Thursday, September 24, 2009

Now, US govt is giving out subprime loans

Written by Vivek Kaul
Posted by Stefanie Marty

Once bitten, twice shy? Not if it's the government of the United States.
In a bizarre piece of logic, the Barack Obama-led administration has been giving out subprime loans through the Federal Housing Administration (FHA), a government agency.
Prime home loans are the best part of the market, where only borrowers with good credit ratings get a home loan. Subprime home loans are the worst, typically involving borrowers with very bad credit history and who won't get a loan in the normal scheme of things. No reiterating how the shower of such loans opened the floodgates of the current financial crisis upon us.

Why then is the US government giving out these loans again, and through a government agency? Experts say the idea may be to prop up the housing prices, which have gone on a free fall.

"It probably is to support the financing on the housing finance market and therefore housing prices generally, as well as supporting the home ownership aspirations of the lower socio-economic part of the society," says Satyajit Das, a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives.

The US Federal Reserve has maintained interest rates at close to zero percent for some time now. Despite this, banks are not willing to lend.

"The US government is desperately trying to inflate the economy and it wants to get credit flowing again in order to stabilise American housing.

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