The mortgage buck stops where?

A public reckoning by Congress is needed before taxpayers are put on the hook.

By the Monitor's Editorial Board

from the September 22, 2008 edition

Like a subprime mortgage, Congress may soon put taxpayers on a risky hook for mortgages gone bad. The Bush administration wants authority to spend up to $700 billion, or about the cost of the Iraq war, to buy up troubled loans. A federal rescue effort may stem a financial market meltdown. But it shouldn't be done without a reckoning.

Americans need to hear a full-throated debate by lawmakers about the range of players in this mortgage maelstrom who either lied, took on too much debt, or failed to check creditworthiness as these loans were issued and then sold up the financial food chain to the point where it has become nearly impossible to determine their value.

They also need to hear about the government's role in encouraging a housing bubble – and that will mean Congress needs to look at itself. No longer should federal support for owning a home be based on the false premise that housing prices will always go up or that taxpayers are the final backstop for mortgage holders.

The reason for such a public accounting isn't vindictive. And Congress may not even be able to accurately apportion blame or determine the price to be paid for past mistakes. Rather, it is to help make sure that lessons are learned and that better safeguards will be put in place to prevent another cycle of bad debts.

America is in the midst of a morality tale. From the Wall Street titans who failed to assess risk to the home buyers who lied about their income on mortgage applications, the message must now be one of zero tolerance for such misdeeds.

Congress should also determine if the proposed federal purchases of bad mortgages will come at fire-sale prices. The plan calls for the Treasury Department to pay for mortgages that American-owned financial institutions have been unable to sell. The assumption is that the property market will eventually pick up, and Treasury can later unload these debts at a profit to taxpayers. This will allow financial firms to get on with normal business without a cloud of uncertainty hanging over their assets.

With Uncle Sam offering cash on the barrel, however, it may be tempting for firms to enter a game of chicken and demand a price that will allow their shareholders and management to suffer little. Congress should make sure that Treasury is not allowed to blink and pay too much to recoup a taxpayer investment.

Lawmakers could, of course, decide that there are other ways than buying up mortgages to unclog credit in financial markets. They could simply offer loans to troubled companies. But for now, with the financial system at risk and last week's stock-market gyrations, the crisis calls for swift action.

Temptations in Congress will be strong – just five weeks before an election – to tack on other demands in order to cater to special interests. This will only distract from a reckoning and delay passage of the purchase plan. Other efforts, such as being lenient toward homeowners facing foreclosure, can come later.

First, taxpayers need to know if deterrents are coming to avoid another mortgage crisis and prevent another tapping of their money.

The buck can't always stop with them.