RMBS Risk from Washington

Just when it looks like we’re managing to get things back under control something comes along and throws a wrench in the works. The economy has been recovering a little bit, jobs are coming back, and housing prices are starting to inch up. Which means it’s time for Uncle Same to do 2 things:

1) take credit for everything

and

2) mess it all up

Unfortunately, that seems to be the pattern with government. They didn’t do anything to improve our situation (I think Short sale investors really can take our fair share of the credit, thanks very much). And they should just leave well enough alone. But along come politicians and need to look like their doing something.

A real glaring examples that’s coming back is something I reported on a few weeks ago. There’s a wacky idea to use the Eminent Domain law to let the government take over your house in order to modify your mortgage. I pointed out at the time how ridiculous it is to let government get involved.

But lately another compelling reason has cropped up to keep government out of our hair. Basically the insane risks banks were taking before the crash got us most of the way into this mess. So now risk has been spread out and we’re not as exposed.

Enter Uncle Sam.

If the government gets too heavily involved in mortgages, then RMBS performance is going to take a serious hit. The government stands to go $589 billion underwater on these mortgages, which increases RMBS risk, driving interest rates up and knocking down confidence in our recovery.

It’s just another shocking scenario that could happen if this goes through. Please tell me I’m crazy. Reassure me that letting politicians step in at this point will not be the nail in the coffin. Anyone?