A disastrous housing fix

John McCain has proposed perhaps the most wrong-headed "fix" yet for the nation's housing difficulties. He would have the government buy mortgages on properties now worth less than the amount owed, then provide refinancing at lower prices and attractive interest rates.

Lenders and about 10 million troubled homeowners would be made whole. But taxpayers would be stuck paying the difference between the original loan and the new, lower valuations.

Homeowners would receive new fixed-rate, 5-percent mortgages, about 1 percent below prevailing rates, refinanced on the lower values determined by the government.

McCain claimed his plan will stabilize home values. Actually it would freeze declining home prices at their current, still-inflated levels beyond the reach of most would-be buyers.

Meanwhile, taxpayers would pay billions to cover the difference between the loans' original value and the arbitrarily chosen intermediate value determined by Washington bureaucrats. Lenders who made risky loans and further profited by packaging and selling them in deceptive securities and borrowers who moved into homes they couldn't afford would be spared the consequences of their bad acts.

The economy probably won't fully recover until housing prices hit bottom, as McCain pointed out. But government intervention to prop up prices only delays that day.

McCain claimed one virtue of his plan is the government will bail out only mortgage holders who made down payments and didn't lie on loan applications. But it wasn't necessary to lie to get risky loans, and down payments were as little as 5 percent of a loan's original value.

In return for providing a second bite at the mortgage apple, taxpayers will be on the hook for the immediate subsidy, and perhaps more later. What if housing prices continue falling? With the precedent established, will government add billions more for homeowners whose property values later fall below the level of their mortgages? When will taxpayers stop paying for others' greed and bad judgment? Then there's the inevitable bureaucratic nightmare of government as appraiser, underwriter, issuer and administrator of $300 billion in loans.

McCain's remedy is based on the notion that life must be painless, and there should be no adverse consequences for bad judgment, outright fraud or covetous greed. He wrongly assumes it's government's role to insulate people from self-inflicted pain.

Bad behavior without consequences encourages more of the same. Pandering to bad behavior all but ensures it.

McCain asserted that his scheme will return trust and confidence. If so, it is false confidence and misplaced trust that will force taxpayers, including the 97 percent of homeowners who responsibly pay their mortgages, to foot the bill.