"The U.S. government should just get out of the way and allow the crash in U.S. housing; the market is too big, has too far to fall and Americans’ finances are too strained." opens a cheery Reuters Big Debate column.

Well there's someone with all the smugness of a paid columnist. I wish I too was paid for writing crap, but then again the job of many online commentators is to attract comments (and abuse) and thereby eye-ball counts rather than talking any sense.

Yes, let the US housing market crash and... what will that achieve? Ditto for other housing markets such as the UK. The logic is that repossessing the homes of defaulters and turning them into rental accommodation is the best way forward. After all, the statistics show that just over half re-financed mortgages went into arrears again within 6 months.

OK, hold on a second; how were these remortgages set up? There is one thing I find truly astonishing - OK there are many, but let me concentrate on this one.

"Freddie Mac's average 30-year loan rate was 5.04 percent in the past week, down a full percentage point from 6.04 percent since November.

"They've been successful at driving down primary mortgage rates. That's the objective of the Fed's MBS purchase program, to make housing finance more affordable," said Kevin Caron, a mortgage strategist at FTN Financial in Chicago."

Do you see the problem? Mortgage rates down to 5%! Where are the Fed's lending rates? About 1.5% taking an average of different quotes. the Fed Funds rate is an astonishing 0.25%. However, the 30-year Treasuries are still up as high as 3.5%. So why aren't Freddie Mac and Fannie Mae issuing mortgages at about 3.5%? Isn't that their primary task, to somehow clean up the mess of high interest rates on high value mortgages?

But here's the problem, the mortgage-backed securities market still exists. It seems like that is the Fed's main interest, not the mortgage holders. Freddie Mac has just issued $10 billion of 3-year notes. A high risk premium is still being priced into this market so the issue came in at about 6% per annum yield. The main buyers of this stuff are... the Fed, either themselves or as the agency for the US Treasury.

Although these rates have fallen the 1% quoted at the start they are still way too high compared to the Fed's own lending rates. The Fed itself is laughing all the way to its own banks as it gets a fee from the government and is getting paid a high percentage by a company it is supposed to be insuring and then lending that money straight back out to the rest of the world.

Surely this mess will only stop when borrowers are paying a monthly mortgage that is commensurate with the current economic climate. The Fed is in effect now in control of mortgage market rates through the two FM companies. Their conflict of interest between the politics of American mortgage holders and the finance of the mortgage-backed securities market seems glaringly obvious.

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