The FHA continues to guarantee risky loans on behalf of the American public. And they’re now backing loans of almost $1m. Clearly, the FHA no longer serves the purpose it was created for – providing responsible loans to low-income and minority borrowers.

The current system simply transfers risk from private lenders to taxpayers. What a deal for lenders – government takes all the risk, and lenders only have to do paperwork and service the loan. With this kind of sweetheart deal, it’s no surprise that banks are reaping huge profits.

Part of recent profits are due to banks setting aside smaller cash reserves to cover losses. But why should they? Taxpayers will mop up the red ink, while banks reap all the gains. See Freddie Mac, Fannie Mae, AIG, and GMAC for more examples. Quite the recurring theme these days.

Add accounting gimmicks and low interest rates, and voila! Banks look great again. The overall economy, not so much. But banks are cleaning-up.

Excerpt from a great NYT piece.

In January, Mike Rowland was so broke that he had to raid his retirement savings to move here from Boston. A week ago, he and a couple of buddies bought a two-unit apartment building for nearly a million dollars. They had only a little cash to bring to the table but, with the federal government insuring the transaction, a large down payment was not necessary. “It was kind of crazy we could get this big a loan,” said Mr. Rowland, 27. “If a government official came out here, I would slap him a high-five”… Some F.H.A. borrowers here say they have the cash for a full down payment but would rather invest it in the stock market or use it for remodeling. Others, like Mr. Rowland and his friends, simply do not have the money required by private lenders — which would have been nearly $200,000, in their case.

Apparently we haven’t learned much from recent crises. The current strategy is to resurrect the problems that got us into this mess, but on a larger and publicly-backed plan. Push back doomsday a few years if you can.

Take a look at these past FHA pieces if you’re interested, where I uncovered some ridiculous claims from FHA-backed lenders:

#1 – FHA – Bailout waiting to happen?

#2 – FHA dutifully following sub-prime playbook

#3 – Quicken Loans responds