[Erin] Rewarding the guilty

The unfolding of the Countrywide mortgage scandal implicating Senator Chris Dodd as well as other members of Congress continues to be interesting. This Wall Street Journal editorial connects some of the dots:

Give Senator Christopher Dodd credit for nerve. On Tuesday, the very day he finally admitted knowing that Countrywide Financial regarded him as a "special" customer, the Connecticut Democrat also announced that he was bringing to the Senate floor a housing bailout sure to help lenders like Countrywide.

How much will Countrywide benefit from Mr. Dodd's rescue? The Senator's plan allows mortgage lenders to dump up to $300 billion of their worst loans on to taxpayers via a new Federal Housing Administration refinancing program, provided the lenders are willing to accept 87% of current market value. The program will be most attractive to lenders and investors holding subprime and slightly-less-risky Alt-A loans made during the height of the housing bubble in 2006 and 2007.

The million-dollar question in all of this, as the WSJ asks, is why the American taxpayer should be asked to provide the bailout for chancy loans made by lenders whose practices can most charitably be described as incompetent:

If borrowers and lenders take full advantage of this new federal program, and Countrywide loans go south at roughly the same rate as those from other lenders, this suggests a potential taxpayer bailout of more than $25 billion for Countrywide-originated loans. Even if the losses turn out to be far less, why should taxpayers do anything to help a company that did so much to foment the mortgage mess?

Now, I know that Countrywide might have led lots of innocent people into believing they could afford more in home loans than they really could. When my husband and I moved to the DFW area one of the people we spoke to about getting a home loan told us that we would qualify for almost $40,000 more in home loans than we knew from both other lenders and our own assessment of our finances would be possible for us to handle; he said that this loan would most likely be held by Countrywide. But for every home buyer like us who had done our homework, how many other home buyers, especially first-time ones, ended up taking on too much debt based on somebody's casual assurance that they could always refinance later, and that besides, most people get raises etc. that will cover the shortfall?

But the plight of the home buyers who may face foreclosure is only part of the story. The greed of mortgage lenders, the possible complicity of various regulators, the willingness of some in Congress to accept "VIP" treatment from Countrywide, is the other part. And whatever we, as a nation, decide to do about all of this, it's best that the whole story gets told, and that the people whose shortsighted greed precipitated this whole mess don't walk away unscathed.

Update: Now this is a step in the right direction.