Just when you think everything about the origin, buildup and the mayhem unleashed by subprime mortgage loans has already been inked and rehashed and the lessons learned, Washington drums up another wackadoo scheme which simply sets the stage for a relapse.

Starting June 1, Fannie Mae will accept up to 97% loan-to-value (LTV) ratios for conventional, conforming mortgages processed through its Desktop Underwriter (DU) automated underwriting system, and 95% LTV ratios for loans underwritten outside of DU, in all geographic locations in the U.S. The new national down payment policy will supersede the policy the company adopted in December 2007 that required higher down payments in markets where home prices are declining, Fannie Mae notes."

As another part of our Keys to Recovery initiative, we are today announcing that we will be equalizing the down payment requirements for borrowers in all parts of the country, regardless of local market conditions," states Marianne Sullivan, senior vice president of single-family credit policy and risk management. "This new down payment policy reinforces our goal to support successful home-owning, not just home-buying, as we seek to bring liquidity to all communities and help the housing market recover." - Fannie May News Release, May 16, 2008

Sound innoucous? Read Caroline Baum's column in Bloomberg News. She's got a way with words. With widespread expectations that prices will continue to fall to attract buyers, Fannie Mae is loosening down-payment requirements when a house in these areas could be worth less than its loan value in a matter of months? The only reason to ease standards is public pressure: from Congress, from Fannie's friends in the housing industry and from homeowners' advocacy groups. Didn't we learn anything over the past two years? We're still mopping up from the effects of lax loan standards, with delinquencies and foreclosures rising and profits at financial institutions falling.

Put another way, the real estate industry dug itself and the entire country into a deep hole because it handed out housing loans to anyone who wanted one, and even reeled in some people who didn't really want a loan. And how does Washington respond to this crisis? By making it even more easier for people to take out a loan.

And if that's not misguided help enough for the oh-so-suffering home owners without the means to pay for said home, the Senate Banking Committee approved legislation to prevent foreclosures. Details of the plan from Reuters. Under the Senate plan, lenders who agree to erase a large share of the original loan amount could win a government guarantee on future mortgage payments. Other provisions of the bill would create a stronger regulator for mortgage-finance companies Fannie Mae and Freddie Mac. Both the Senate bill and a similar House bill call for creating a fund under the Federal Housing Administration to let thousands of distressed borrowers refinance into government-guaranteed loans. The legislation would have the two government-sponsored enterprises cover a large share of the losses that the new fund is expected to absorb.

So, let me sum up how Congress is fannieing the dying embers of the subprime flameout into another roaring forest fire. First, they reduce down payments required for new loans in places where prices are headed south. Which effectively means the loans will be bigger than the house price pretty soon. And to top it off, they introduce legislation which tells lenders not to worry about a few missed payments. Just write off some losses created by a fall in the value of the house, and hand over the borrower to the government, who then will give the borrower another loan for the same house, at even better terms, with even lesser down payments, and with the price of the house dropping some more.

Where is this heading to? Fannie May either would need multiple huge transfusions of public funds, same as the investment banks who are raising billions to cover the subprime writedowns. Or it would be another victim of the subprime debacle. Actually, make that a victim of a subprime congress who can't face reality, and are piling up debt and offering wannabe homeowners a mirage.