EDITORIAL: Robbing the bank

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Some risks don't pay off. The time comes when the right thing to do is to let a bad investment sink. This is more responsible than continuing to throw good money after bad to keep unwise ventures afloat. For the housing market to turn around, bad mortgages must be allowed to sink -- but Congress has other plans.

Rep. Barney Frank, Massachusetts Democrat, is threatening to revive legislation that would let bankruptcy judges rewrite mortgage contracts if banks don't "voluntarily" write off a larger percentage of bad home loans. The policy ideas of the savvy chairman of the House Financial Services Committee should be taken seriously.

Mr. Frank was among the politicians who pushed for changes in underwriting standards over the past decade. Those new rules involved eliminating verification of income or assets and virtually eliminating down payments to get a house. Those modifications greatly contributed to the current financial crisis. There was a seemingly noble goal in loosening lending standards to increase homeownership among poor and minority Americans, but the changes created a time bomb that was set off as soon as property values began to decline.

Making it possible for otherwise unqualified people to buy homes increased demand and thus increased housing prices. As long as housing prices rose, the problems were hidden. So long as home values kept increasing, few owners had to default because if someone was unable to pay the mortgage, the house could be sold at a profit. As long as prices continued to rise, people could accurately claim that the new standards did not have an appreciably different default rate than the old standards.

On Tuesday, Treasury Secretary Timothy F. Geithner announced that two dozen mortgage companies have agreed to "voluntarily" forgive the debts of 500,000 mortgage holders by Nov. 1. Mr. Frank's threat to rewrite existing mortgage contracts was tossed around to make sure mortgage companies realized that there would be real consequences if they didn't give away enough money to reach that goal.

For a housing market still suffering from past government intervention, political coercion to forgive debts will have a chilling effect on the willingness of banks to make new mortgage loans. Fewer loans mean fewer house sales, which leads to lower housing prices as the supply becomes increasingly larger than demand.

With so much money at stake in the financial services sector, corruption and impropriety are common. Last week, Sen. Christopher J. Dodd, Connecticut Democrat, and Sen. Kent Conrad, North Dakota Democrat, were caught prevaricating about below-market interest loans they received from Countrywide Financial. Both senators claimed that they didn't know they were getting special favors, but Robert Feinberg, who worked in Countrywide's VIP section, told the Senate Ethics Committee that both senators were told exactly what special benefits they were getting.

Those sweetheart deals from Countrywide were highly improper given that Mr. Dodd is chairman of the Senate Banking Committee and Mr. Conrad serves on the Senate Finance Committee, both of which write laws related to Countywide's business. Democrats, who have the majority in both houses, are refusing to follow up on this scandal and have not subpoenaed Countrywide records to find out what other lawmakers benefited from discounted mortgages from an industry they regulate.

Giving Congress ever more power over banks is like letting hungry foxes into the henhouse.