The White House is hoping to strong-arm banks into paying off the mortgages of irresponsible homeowners at the expense of the rest of us. The idea is to tap financial institutions to create an unregulated $20 billion slush fund to pay off the principal for people who are upside-down and delinquent on their housing payments. Political appointees in the Obama administration would get to choose the winners and losers in the house pay-off lottery.
House Financial Services Committee Chairman Spencer Bachus wants Treasury Secretary Timothy F. Geithner to pull the plug on this bad idea. "We believe that a $20 billion principal reduction fund will create incentives to default that could worsen the housing crisis and impede economic recovery," the Alabama Republican wrote in a May 6 letter to Mr. Geithner.
The White House is silent on the backroom deal being struck by the nation's top-five mortgage firms and state attorneys general as part of a settlement of "robo-signing" charges brought by the Department of Justice. The banks were accused of failing to obtain all the proper certifications before foreclosing on some homes. However, there's little evidence that anyone was foreclosed who hadn't already defaulted on a mortgage.
On Tuesday, Rep. Patrick T. McHenry called a top White House official to testify before his House Oversight subcommittee that has jurisdiction over bailout programs. He wanted answers from Elizabeth Warren, an assistant to President Obama and special adviser to the secretary of the Treasury for the Consumer Financial Protection Bureau. Mr. McHenry took Ms. Warren to task for statements she made before another committee. "Professor Warren testified that the bureau's role in ongoing mortgage settlement negotiations was limited to 'advice,' " the North Carolina Republican said. "Since her testimony, however, Congress received evidence that Professor Warren and the bureau were deeply involved in the negotiations... the emergence of the bureau's 'settlement presentation' and the fact that Professor Warren has been in dozens of meetings with federal and state officials about these settlements raises concerns about the veracity of her testimony."
The lack of transparency in the program is the least of its faults. As a whole, the scheme is a classic exercise in left-wing showmanship. It allows Democrats to pretend they are punishing the "big banks" and distract the public from noticing that Wall Street firms were among Mr. Obama's top campaign donors. Those banks, in turn, will just pass along the added cost of the bailout to consumers in the form of increased fees for services. It also arms bureaucrats with new candy to pass out to a huge number of potential voters; about 5 percent of all first-lien mortgages are in foreclosure, according to the Government Accountability Office.
It's fundamentally wrong to reward people for irresponsible conduct because doing so merely encourages more bad conduct in the future. Any settlement that comes from the banks should be directly used for the original narrow purpose: to compensate those who were wrongly foreclosed, if there are any. Before any final deal is reached in the negotiations, Mr. Geithner needs to provide Congress with details on how the final amount of funds will be dispersed so those who pay their bills don't wind up getting stuck with the bill for those who don't.
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