Punk Ziegel analyst Richard Bove became the latest high-profile market observer Wednesday to predict that the feds will take action to forestall the collapse of the U.S. housing market. Bad mortgages "have become a major problem," Bove says in a research note Wednesday. He suggests that the government may end up proposing to ease the pressure on the sagging mortgage market by offering low-cost federally backed loans to homeowners whose adjustable-rate mortgages are about to reset to much-higher rates. Bove puts the cost of a bailout at $100 billion but says even that hefty price tag could come to be seen as modest given the scale of potential problems in the housing market. Bove says a historical precedent exists for encouraging mortgage companies to originate loans that would be insured by the Federal Housing Administration and the Veterans Administration. The loans, he says, could be sold by Government National Mortgage Association and Fannie and Freddie. The government "can rail against the lenders who made these questionable loans arguing that they followed imprudent policies," Bove writes. "It can argue that homeowners showed no discipline in taking out loans that they could not pay back. Or, he adds, "it could tighten up a few laws and then conclude that whatever happened in the past in the mortgage industry happened in the past. Then it might unveil a massive money-losing bailout program to keep people in their homes. "I am quite confident that this will happen," Bove concludes. "Rationality will prevail."

— mortgaege bailout  

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