McCain's Housing Plan May Fix Some Bad Loans But Surely Encourages Others

Let's flashback to the 1980's. Ronald Reagan and Teddy Kennedy create an illegal alien amnesty bill that will supposedly "fix" illegal immigration once and for all. Did it fix it? No. All it did was encourage untold millions of other illegals to come to the United States and wait out the next amnesty bill (which they almost got thanks to McCain-Kennedy).

Now the federal government is scrambling to figure out what to do with homeowners who, through their own ignorance, stupidity or greed, signed up for mortgages that have become unaffordable as their homes depreciate in value. Has there been some loan fraud along the way? Sure. But I'd venture a guess that most homeowners who signed up for interest only or teaser rate deals were fully aware that they would not be able to afford the loans when the planned adjustments occurred.

Since it is liberal orthodoxy that the federal government is required to bail out stupid people, John McCain is proposing his plan which reminds me an awful lot of the 1986 amnesty bill:

This plan is focused on people. People decide if they need help, they apply for assistance and if approved the government under my HOME Program supports them in getting a new mortgage that they can afford. There will be qualifications which require the home to be a primary residence and the borrower able to afford a new mortgage. We will combine the power of government and the private sector to find immediate solutions for deserving American homeowners.

My plan follows the sound economic principle that when markets decline dramatically, debts must be restructured. It is built on the reality that homeowners should have an equity capital stake in their home. Homeowners would end up with a 30-year mortgage and an equity stake in their home. The new lender would receive a federal guarantee of the mortgage. And the taxpayer gets a benefit if the sale value ever recovers.

The obvious question is: Will this plan not only fix the current problem but prevent future problems? No. Many homeowners who frankly shouldn't be bailed out will benefit from government largesse at the expense of taxpayers, and many more will enter new, equally dumb loan agreements looking forward to that day when they will not be able to afford their loans and the government will step in once again and bail them out.

The best thing the government could do right now is...nothing. Let the mortgage crisis solve itself and weed out the people who shouldn't have made the purchases they did and the companies that shouldn't have made the loans they did. It's a self-cleaning process if we leave it alone. Over time, the economy and the lending industry will be better off with the problem entities gone.