Don’t throw mortgage money after bad loans

Always inclined to confuse action with thought, Congress has embraced the old joke about solving a crisis — “Don’t just stand there; do something!” — and applied it to the nation’s current housing problems. The better course is to stand there and do only what’s absolutely necessary. After all, standing still is certainly better than jumping off a cliff.

In macroeconomic terms, HouseFinancial Services Chairman Barney Frank, D-Mass., is proposing to jump off a cliff in order to preserve the view. For a problem caused by risky home loans made to people who couldn’t afford them, Frank proposes to make it even easier for people to get loans despite low incomes or low credit ratings. And he wants American taxpayers to insure $300 billion of high-risk mortgages for recent homebuyers in danger of defaulting on their loans. Remarkably, his proposed terms are so lenient that Rep. Frank himself has worried aloud that some perfectly solvent borrowers might “purposely default” in order to qualify for the new deal. How this approach can possibly stabilize home values is beyond us. It is more likely to cause a race to the bottom that will delay, not hasten, any recovery.

Meanwhile, last week Senate leaders were moving forward with a less grandiose bill while rejecting awful ideas such as letting judges unilaterally reset mortgage rates. Some of the Senate bill’s provisions make sense, such as expert counseling to help at-risk homeowners avoid foreclosure, a longer grace period before commencing foreclosure proceedings against soldiers returning from service, and increased transparency of mortgage information. But one ill-advised provision would let companies that profited from the housing boom get refunds of taxes paid as long as four years ago in order to write off current losses. And deficit watchers should be apoplectic that new floor amendments could boost the bill’s overall price tag from an already-too-high $11 billion up toward $20 billion.

We should beware attempts by government to solve problems that government itself helped create. The present crisis illustrates the truth of President Reagan’s maxim that government is the too often the problem, not the solution.

Fannie Mae weakened its mortgage underwriting standards — much as Rep. Frank would have the Federal Housing Administration do now — in a bid to raise homeownership rates while currying favor for the Clinton administration among minority voters. And earlier this decade the Federal Reserve Board recklessly pushed its key interest rate down to 1 percent, and kept it there far too long. Everybody will benefit when Washington stops subsidizing risky lending practices instead of having taxpayers insure them.

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