Sen. Hillary Clinton yesterday threw her weight behind a plan by Rep. Barney Frank (D-Mass.) and Sen. Chris Dodd (D-Conn.) to authorize the Federal Housing Administration (FHA) spend $20 billion in taxpayer money to guarantee up to $400 billion in questionable mortgages. Considering Sen. Barack Obama is already a co-sponsor of Dodd’s legislation, and the House has already scheduled hearings on the bill, the plan is likely to become the front line in Congress’ fight to “do something” about the current financial instability.

Under the Frank-Dodd bill, lenders that chose to take part in the new program would agree to reduce loan amounts and refinance mortgages at lower rates in return for a cash fee. The refinanced loans would then be guaranteed by the FHA and the lender would have no further credit exposure if the borrower subsequently defaulted. This means taxpayers would be on the hook for any defaulted loans refinanced through the program. The Frank-Dodd plan is essentially a government buyout disguised as a refinancing plan. Specific problems with the program include:

  • The plan makes no distinction between homeowners who gambled on a speculative loan they had no chance of repaying in hopes of flipping the house on the market and those homeowners who fell into trouble through no fault of their own.
  • Even if the money went to FHA immediately, it is not possible to implement this plan quickly. It will take months to individually refinance each of the 1 million to 2 million loans the plan intends to benefit.
  • Borrowers with legitimate problems are already being assisted by the voluntary Hope Now program. Frank-Dodd attempts to do the same thing as Hope Now is already doing except is would cost the taxpayers $20 billion in new spending and expose them to $400 billion in new risk.

Frank-Dodd would set an extremely bad precedent, as lenders will quickly request that similar guarantees be made available to all loans to borrowers with poor credit histories or lower incomes. It would be a step toward government micromanagement of the mortgage market and would also signal that there are no real consequences for poor lending practices.

Quick Hits:

  • Britain’s chief scientific adviser at the Department for Environment, Food and Rural Affairs apparently did not get Al Gore’s “the debate in the scientific community is over” memo, and is preparing for a battle with the European Union over compulsory quotas for the use of biofuels.
  • Upon further review, biologists are challenging earlier claims that global warming is to blame for the disappearance of the vanishing harlequin frogs.
  • The WildEarth Guardians are suing the Bush Administration for failing to whittle down a backlog of plants and animals being considered for endangered species protection.
  • Liberals from around the world are flocking to Venezuela to soak up Hugo Chavez’s experiment in socialism.
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