Editorials

The proposed bailout of the subprime mortgage banking sector is the worst form of government intervention. Under the guise of doing something for distressed borrowers, the legislation authored by Sen. Christopher Dodd, D-Conn., and Rep. Barney Frank, D-Mass., will bail out lenders, instead.

What’s worse is that the Dodd-Frank bill would both prolong the housing crisis and shift shaky mortgages from the balance sheets of the companies that made the risky loans, to taxpayers.

The bailout will primarily aid large mortgage lenders such as Countrywide Financial, points out former House Majority Leader Dick Armey, who now heads up FreedomWorks, a Washington-based policy group.

“The Dodd-Frank plan would allow Countrywide and others to cherry-pick their worst loans and roll them over to the FHA,” Armey says. “The bill has been advanced in the name of homeowners, but it’s all too clear who is being rescued.”

The bill comes just as Dodd is coming under scrutiny for his participation in a Countrywide program that allowed him to obtain a “sweetheart loan,” Armey adds.

“The growing scandal surrounding the ‘friends of Angelo’ loans (so-called by company employees, referring to Countrywide CEO Angelo Mozilo) should serve as a political wake-up call,” Armey says. “Yet the Senate appears intent on pushing forward legislation, co-authored by Sen. Dodd, that would bail out the worst actors in the subprime mortgage banking industry.”

Dodd-Frank is bad news for taxpayers, Armey contends “The bill will allow troubled financial institutions to foist the riskiest mortgages in their portfolios onto the Federal Housing Administration (FHA) — ultimately putting the American taxpayer on the hook for their bad bets,” he says.

The Congressional Budget Office supports Armey’s contentions, warning that about 35 percent of the loads refinanced through Dodd-Frank would eventually default anyway.

“Those rates reflect CBO’s view that mortgage holders would have an incentive to direct their highest-risk loans to the program, and are based on the expectation that the underwriting standards established for the new program would be less restrictive than those currently in place for FHA’s single-family loan guarantee program, thereby allowing the FHA to insure loans with a greater risk of default,” the CBO reports.

Armey comments, “The CBO estimate reveals who is really benefiting from the Dodd-Frank approach. Large mortgage lenders like Countrywide Financial get to reappraise then send 100 percent of the liability to the FHA. Dodd-Frank guts FHA lending standards and makes shaky mortgages a new multi-billion problem for taxpayers, while rewarding reckless lenders.”

Most Republican members of the Senate Banking Committee supported the Dodd-Frank bill, however, because of promised reforms for the Fannie Mae and Freddie Mac programs.

“While both of these agencies are in dire need of reform, this deal is still a mistake,” Armey says. “By foisting this compromise on their Republican colleagues, Democrats are holding the reform of Fannie and Freddie hostage in order to increase bipartisan support for a bailout of reckless mortgage lenders.”

Congress must stand up to Dodd and Frank and reject this bill as bad business.

“In a free market, businesses take risks and reap either profits or losses,” Armey points out. “But markets only work when businesses are held accountable for their bad decisions. The message this proposed legislation sends to the market is clear: Big lenders like Countrywide who make bad bets can count on generous bailouts — and responsible renters, homeowners and taxpayers who pay their bills on time can count on getting stuck with the tab.”

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