A Chequer-Board of Nights and Days

Alan Reynolds points out the myriad problems with the new scheme. An excerpt:

If risky subprime borrowers were actually supposed to be the main beneficiaries of such refinancing assistance, then it would have been the height of irresponsibility for President Bush to suggest greater involvement of the Federal Housing Administration, Fannie Mae and Freddie Mac. Shifting default risk to U.S. taxpayers could be very costly.

In reality, the only financial aid in this plan goes to those who qualify for the five-year freeze on mortgage rates -- a curiously selective little group, estimated to number between 145,000 and 360,000.

When it comes to resetting mortgage payments below the level borrowers agreed to, why give a special deal to Sam but not Suzie? On the day the plan was unveiled, the Mortgage Bankers Association reported that 0.78% of mortgages went into foreclosure in the third quarter, and that 5.59% were far behind in their payments. Neither group qualifies for any help under the Bush plan. Neither does anyone with imperfect timing -- those who took out a mortgage before 2005 or after this July. Among the few lucky enough to slip through that narrow window, the primary criterion for a rate freeze is a weak credit rating, below 660. And what happens after five years? Presidential contender Sen. Hillary Clinton is already talking about stretching it to seven years, and that bidding war has just begun.

On the face of it, these criteria for political favoritism seem only marginally more sensible than limiting special loan terms to, say, short people or redheads.

Is it a bailout? The stock market sure thought so. Stock prices of mortgage companies and homebuilders soared on the news. After all, the plan was designed by and for those same companies -- key members of the "Hope Now Alliance."

Treasury Secretary Hank Paulson describes the arbitrary rewriting of financial contracts as a win-win situation for everyone. If that were true, the government would not have to get involved. In a win-win deal, Sen. Clinton would also not have felt compelled to threaten legislation to prohibit lawsuits from unhappy owners of mortgage-backed securities. If this "changing of the rules in the middle of the game," as many have described it, becomes a precedent, future funding will dry up quickly and permanently -- particularly for low-income borrowers. Why buy a bond that can have its terms changed by political whim?

Sadly, answers to these questions do not appear to be in the offing.