Forget Instarefi: Here Comes Instaloanforgiveness

As if the main rumor of the prior week, that the government was going to automatically push rates on all mortgages down to market rates (which as of today hit a fresh record low of 4.49%) was not enough, today James Pethokoukis reports that the latest iteration in the "let's make Fannie and Freddie broker than ever" rumor mill is that the "Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth." As readers will recall, we highlighted a few days ago that the number of underwater mortgages is at least 14.7 million (and likely far more), and amounts to just about $770 Billion in underwater equity. In other words, if the rumor is true, the US taxpayers are about to subsidze over three quarters of a trillion in underwater equity (and bail out banks on the hook for over $2 trillion in impaired debt). There is no indication if the "instarefi" plan contemplated by Morgan Stanley and Merrill Lynch has been scrapped, but what is certain is that the two plans target two very distinct beneficiary groups: the former plan would mostly benefit middle and upper class mortgage holders who are likely preoccupied to bother with a 200-300 bps refi differential. The loan absolution plan, on the other hand, focuses squarely on the poorest 15 million US households of society. While it is distinctly possible that Obama, in all his economic lunacy, will pass both plans, his advisors have likely done the math and are now convinced which way the negative IRR to the taxpayer will be greater: that is certainly the plan that will be undertaken.

More from Pethokoukis:

Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to Fannie and Freddie, pledging unlimited help. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama’s loan modification effort. HARP was just extended through June 30, 2011.

The move, if it happens, would be a stunning political and economic bombshell less than 100 days before a midterm election in which Democrats are currently expected to suffer massive, if not historic losses. The key date to watch is August 17 when the Treasury Department holds a much-hyped meeting on the future of Fannie and Freddie.

Keep in mind the political and economic context. The nascent recovery is already running out of steam. Wall Street economists just downgraded the government’s second-quarter GDP estimate of 2.4 percent to around 1.7 percent. And as even Treasury Secretary Timothy Geithner is warning, the unemployment rate may well begin to rise back toward the politically toxic 10 percent level given such sluggish growth. Many in the White House thought the unemployment rate would be dropping sharply by this point in the recovery.

But that is not happening. What is happening is that the president’s approval ratings are continuing to erode, as are Democratic election polls. Democrats are in real danger of losing the House and almost losing the Senate. The mortgage Hail Mary would be a last-gasp effort to prevent this from happening and to save the Obama agenda. The political calculation is that the number of grateful Americans would be greater than those offended that they — and their children and their grandchildren — would be paying for someone else’s mortgage woes.

This latest bout of fiscal insanity is happening just as the government is passing yet another $26 billions state bailout package.

U.S. Senate Majority Leader Harry Reid said Thursday the Senate will vote in the late morning to pass a $26 billion aid package to help budget battered state governments with their Medicaid expenses and to retain about 100,000 school teachers.

In remarks on the Senate floor, Reid said the Senate will take up the package at 11 a.m. ET, hold a brief debate and then vote on several procedural motions before passing the bill.

The Senate voted Wednesday, 61 to 38, to end the debate on the bill.

The bill the Senate will pass Thursday provides $10 billion to states to prevent teacher layoffs and $16 billion for the Medicaid health insurance program for the poor.

At this point one thing is certain: as long as the Treasury can keep issuing trillions in new debt without a glitch, there will be nothing to stop the administration, now in its pre-midterm death throes, from throwing the kitchen sinks, and 9 other it bought on margin, at every imaginable problem. The Obama administration is about to take this country down in flames by spending hundreds of billions, trillions, tens of trillions on anything and everything, just like your garden variety drowning man clutches at straws. And as long as the Fed has the bond vigilantes locked up, kneecapped and ball-and-gagged in its basement, there is nothing at all that can be done: we suggest leaning back in your favorite made in China chair and watching the nation''s slow motion collapse as it unravels before our very eyes.