The unintended consequences of a terrible idea

The New York Times reports this morning that the draft of the bailout bill negotiated yesterday "requires the government to use its new role as owner of distressed mortgage-backed securities to make more aggressive efforts to prevent home foreclosures."

There is a catastrophe lurking in that sentence.

Now, nobody likes foreclosures.

Nobody, that is, except the people on the sidelines who have been trying to buy a house for years and have been waiting for prices to come down so they can finally afford one.

And maybe some resentful people who paid higher fees and a higher interest rate for a 30-year fixed mortgage on a little less house, while other people recklessly used adjustable-rate and interest-only mortgages to buy houses they knew they couldn't afford.

But nobody else likes foreclosures, especially not the House and Senate Democrats.

They like to help people.

They blocked efforts to restrain the size of Fannie Mae and Freddie Mac, because they wanted to help people with bad credit and no money buy houses with government-backed mortgages.

Now they want to help people by bailing out Wall Street firms that hold securities tied to those mortgages. The Democrats are as surprised as anyone to learn that some of the people with bad credit and no money aren't making their mortgage payments.

So their new plan to help people would require the government to "make more aggressive efforts to prevent home foreclosures."

Does that mean that once the government holds the mortgage, it will not foreclose on distressed homeowners who have stopped making their mortgage payments?

It had better not mean that.

Because when word gets out, everyone with one of those mortgages is going to stop making their mortgage payments.

Hey, why not?

Nothing's going to happen to them if they don't pay. They already have bad credit, and now the government will be prohibited by law from foreclosing on them.

That means the securities the government is buying with your $700 billion dollars are going to sink like stones. Right now, the Treasury Secretary assures us, the securities have some value because not all the mortgages mixed up in them are bad. So the plan is to stabilize the market and eventually sell those securities at a profit.

But if the government isn't allowed to foreclose on people who stop paying, everybody will stop paying and the problem will get bigger and bigger until it becomes impossible to reverse the policy without crashing the real estate market nationwide.

Instead of being sold to new owners on sound financial footing, the homes will be occupied by people who have effectively become squatters in government housing. On block after block after block.

What are the Democrats going to do then? Guarantee home-improvement loans?

Meanwhile, the securities the Treasury bought will be worthless. The taxpayers will lose the entire $700 billion and the government will come back to us for more.

Nobody likes foreclosures, and nobody likes declining markets. But it's just immoral, and self-defeating, and possibly insane, to pass a law that subsidizes people who got in over their heads with the tax dollars of people who didn't.

A bill that prohibits foreclosures can't be allowed to get through Congress. It shouldn't even be allowed to make it through Sunday.


Copyright 2008

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