Among the bailout ideas is a plan that would ask lenders to take a small, 10%-15%, haircut on these subprime loans but then bring in the Federal Housing Administration to insure the rest. This idea has backers on Capitol Hill, and we're told it even has takers at Hank Paulson's Treasury.
But if Mr. Paulson embraces it, he'll be putting taxpayers at risk if housing values decline further. He'll also be sending a terrible signal to lenders, borrowers and investors -- to wit, that Congress will save them from bad decisions. Treasury has spent years warning about the risk to taxpayers from expanding Freddie Mac and Fannie Mae. If it now embraces a larger role for their federal housing cousin, the FHA, Treasury's credibility on Fan and Fred will be zero.
All of these plans reflect the political imperative, or should we say panic, to rescue individuals from bad mortgage decisions. But you can't bail out borrowers without also bailing out lenders and investors -- and down that route lies endless taxpayer liability. Before embracing a radical restructuring of the relationships between American homeowners and mortgage companies, it's worth reviewing the facts: Roughly 35% of homeowners have no mortgage debt remaining on their homes. Of those homeowners still paying a mortgage, 95% are paying on time. And even in the risky category of subprime adjustable-rate loans, more than 83% are still paying on time.
~ The Wall Street Journal, "Review & Outlook: Mortgage Meltdown," October 24, 2007