I really wish this were a joke or an article from The Onion.  This is science fiction.  125% loan-to-value mortgages will inevitably default, result in foreclosure and cost taxpayers huge sums of money. 

Why would any fool even want a loan that is 25% larger than the value of his home?  Why not buy the house next door and owe 20% less on the equivalent property?  Better yet, rent the home across the street for a pittance relative to the cost of servicing the mortgage on either property.

"Fannie, Freddie to Refinance Mortgages with 125% LTV Ratios"

This is all going to end very badly.  And I am not referring only to Fannie and Freddie.

I am writing a Doomsday article that will follow the ongoing Bernanke and CPI series.  I believe, based on my understanding of what is actually happening in the economy, that the Federal Reserve may (and is increasingly likely to) intentionally manufacture hyper-inflation.  The economy is flirting with self-perpetuating deflation, and housing leverage is increasing towards a level where a collapse within the consumer-based economy is possible.

Inflating our way out of debilitating asset-lead deflation and crushing leverage may be in the Government's opinion our only way out.  From this perspective, handing out 125% or even 250% LTV mortgages makes perfect sense.  Stop foreclosures, keep people in their homes and then inflate the nominal value of those houses while the debt total remains fixed.  

My concern is not born out of paranoia or pessimism.  It is not based on my admitted lack of confidence in politicians.  My perspective emerges from an understanding of economic and political reality that has proven prescient.  I can not predict the Government's future actions with certainty.  But I can analyze the behavior of our policy makers in the recent past and present, as well as study their stated intentions.  My conclusion is that the future will become increasingly dismal unless the Government dramatically changes its course and tactics. 

I have argued since 2006 (for a variety of reasons) that while an Affordable Mortgage Depression was inevitable, it would never get as bad as the Great Depression from the stand point of human suffering or length of duration.  For the first time, due solely to the Government's grossly mismanaged response to the economic downturn, I can imagine scenes from the Great Depression returning to our "modern" society.