EDITORIAL: Welfare for reckless lenders

OPINION:

When the Senate returns from the July 4 recess to begin the final debate on the 2,323-page financial regulation bill, it should drop the pretense that the bill’s enactment would bring the Troubled Asset Relief Program (TARP) to an early end. The conference report terminates none of the unpopular bailout schemes. Instead, it serves as a showcase of the typical Washington budgetary shenanigans that end up fleecing taxpayers in the end.

Participants in Wednesday’s House-Senate conference committee meeting deployed the smoke and mirrors with a party-line vote approving an amendment that prohibits the spending of TARP money “for a program or initiative that was not initiated prior to June 25, 2010.” Democratic congressional leaders cited this provision to claim that “ending TARP” three months early would help defray the full $27 billion cost of the new regulations. Under the Congressional Budget Office’s arcane accounting rules, the amendment was worth a paper savings of $3.2 billion through 2020. Subsequent floor debate made it clear that this budgetary reduction would never be realized, especially as the Democratic majority’s intention is to expand its favorite TARP handout, the Home Affordable Modification Program (HAMP).

This program was created to reward individuals who took on risky home loans that they ultimately were unable to pay off. The program offers a subsidy to banks that agree, through principal forbearance, to slash the monthly payments of unsustainable loans by $500 per month, on average. Such a lavish benefit comes at an equally lavish cost. HAMP handouts will cost $75 billion, about $50 billion of which would come from TARP accounts. There is so much money on the table that the program’s administrators have been desperately lowering standards in order to enable more individuals to qualify for the freebies.

The Treasury Department’s latest proposed rule change would eliminate the requirement that someone have a job before applying for a subsidized loan renegotiation. Because the program has not fully implemented the new procedures, Rep. Maxine Waters, California Democrat, worried that the early TARP shutoff might sabotage the push to water down lending standards. In a colloquy on the House floor, Mrs. Waters wanted to make the record clear that “ending TARP” would not actually stop the creation of new types of TARP handouts for the unemployed.

“This would not prevent, for example, within the $50 billion already allocated for HAMP, perhaps adjusting resources between already initiated programs based on their effectiveness?” Mrs. Waters asked of House Financial Services Committee Chairman Barney Frank, Massachusetts Democrat. “The answer is a resounding yes,” Mr. Frank responded. “I confirm that the conference report would not prevent adjusting resources between already initiated programs based on their effectiveness.”

So the $3.2 billion in purported savings would be erased by billions in new welfare spending on the holders of irresponsible mortgages. Worse, the federal government is engaged in the same lowering of standards that triggered the housing collapse in the first place. Fitch Ratings last month estimated that up to three-quarters of modified subprime loans would default within one year. Even modified prime loans faced an estimated failure rate of up to two-thirds.

HAMP has never been about encouraging responsible repayment. It’s politically calculated welfare. So far, about 1.5 million have been offered the chance to cut their mortgage payment by a third, at general taxpayer expense. Most of these individuals live in key states like Florida and California, where the housing bust hit particularly hard. The Senate bill is not about stopping “Wall Street bailouts”; it’s about using public money to buy votes.