A bitter pill we may have to swallow

The Senate has passed its housing bailout bill; the House is about to; and the White House has agreed to go along.

The Senate bill, likely to be the template for the final bill, is terribly unfair, perhaps inevitably so. For a start, why are people whose homes are in, or in danger of, foreclosure now entitled to help unavailable to people who lost their homes in less excitable times?

Also left on the outside are homeowners who have struggled successfully to stay current on their mortgages and lenders who were careful about whom they lent to.

The Senate bill has $25 billion in tax breaks for lenders and homebuilders. The Senate gives a $7,000 tax break to the buyer of a foreclosed house, giving the bank that’s selling it an advantage over the seller next door who just wants to move.

The House would give a tax credit of up to $7,500, repayable over 15 years, to first-time homebuyers and it’s fair to ask whether it’s good policy to entice these buyers into a market that’s still falling. One source of the current housing mess is houses whose value fell below the amount still due on the mortgage.

The biggest piece of the final package is likely to be $300 billion for the Federal Housing Administration to underwrite refinanced mortgages. The mortgage companies would take a loss on the existing loan but not as much as if the house went into foreclosure. The homeowners, in turn, would have to demonstrate they can keep up with the new payments on the refinanced loan. The danger is that the taxpayers might find themselves on the hook for the loan companies’ worst performing loans.

The most effective provision — and the most dangerous in terms of precedent — is not in the Senate bill and will not be in the House bill either. That would allow bankruptcy judges to rewrite the terms of mortgage agreements. There is risk in allowing the government to rewrite voluntary contractual agreements where the risks and rewards to each side are presumably balanced.

The lenders say that provision would drive up interest rates. The Democrats say that unless progress is made in curtailing foreclosures they’ll bring it back next year. This bill, unfair as it is, better work.