The housing bill going through Congress that is offering a 300 billion dollar safety cushion to the mortgage industry and borrowers in distress could have some serious long term implications. New Housing and Urban Development Secretary Steve Preston expressed his concerns today.

Taxpayers could end up absorbing “preventable and foreseeable losses” if the final bill does not include initiatives that the administration has long advocated, Housing and Urban Development Secretary Steve Preston said in a call with reporters.

The legislation, passed by the House and pending in the Senate, would allow distressed borrowers to trade mortgages with rising payments for more affordable FHA loans if their lenders forgive a portion of the debt.

If enacted, the FHA would take on riskier loans than it is used to, which could financially overwhelm the agency if safeguards are not in place, said Preston, who has been secretary for a month.

To that end, the administration is urging Congress to allow the FHA to charge borrowers insurance premiums based on credit risk instead of the one-size-fits-all premiums in place since the FHA’s creation in 1934.  via washingtonpost.com.

As I have said many times, when dealing with Washington watch out for the Law of Unintended Consequences. While on the surface many of these programs seem like a solution to the present day problem, the long term effects tend to be tough for the economy and the marketplace and tend to draw out the pain.

If you do not believe me, do some research on the Sarbanes Oxley law. Many companies that previously would have gone public now are remaining private. Why, because onerous restrictions from Washington have created a disincentive to expand.

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