Robbing the Bank; Congress Has Its Way with Financial Institutions

The Washington Times (Washington, DC), August 2, 2009 | Go to article overview
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Robbing the Bank; Congress Has Its Way with Financial Institutions


Byline: THE WASHINGTON TIMES

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.

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