More Rube Goldberg schemes

A writer of our acquaintance grew up in Brooklyn, where getting a "personal loan" was always easy.

He tells a story of paying a call on an eager would-be borrower in the company of a gentleman we'll call "Big Louie," who was to make the loan.

"I'll have no trouble paying it back," the would-be borrower assured the loan shark. "I've got collateral!"

"Collateral?" Big Louie smiled. "No need to worry about that. You're my collateral."

Our acquaintance urged the borrower to find the money somewhere else.

In Washington, Democrats have cobbled together a new program to "solve the problem" of overeager mortgage borrowers who got in over their heads on the dangerous assumption they could always "flip" the house for more, or borrow against its ever-increasing value.

The plan would constitute a massive expansion of the Federal Housing Administration, the Depression-era mortgage insurer. FHA would take on $300 billion in new loans for as many as 1 million distressed homeowners, most of whom otherwise wouldn't qualify for a government-backed loan.

Currently, the FHA won't loan if the borrower would end up paying more than 43 percent of his or her monthly pre-tax income on all combined debt, including student loan, credit card and car payments. The new plan would allow borrowers to go into hock as far as 55 percent.

Big Louie had no problem allowing his customers to go over 100 percent, of course. Washington will get there, eventually.

For now, the FHA would collect a 3 percent fee on the refinanced loans, as well as annual 1.5 percent premiums, and share a portion of borrowers' future proceeds if the property is refinanced again or sold.

So, borrowers will be "helped" by owing Washington an extra 4.5 percent?

And how would borrowers be prevented from using the program to quickly "flip" their house for a profit?

Ah. Let's take a look at the fine print, here. To get the new, easy government financing for defaulting borrowers who couldn't normally qualify, lenders would have to forgive at least 15 percent of the money they're already owed.

Typically, mortgage holders lose up to 40 percent on foreclosures, you see. The idea behind the Democratic plan is that mortgage holders could do better accepting a loss now in exchange for getting a delinquent borrower off their hands than they would if they went to foreclosure.

And should the house in question eventually be re-sold for a profit?

As with those who borrowed from Big Louie, the homeowner would have to agree to share those future profits with the government.

The FHA would get at least 3 percent of the original loan amount when the borrower sold or refinanced. And to discourage borrowers from using the program to quickly "flip" their houses for a profit, the FHA would reap all of the proceeds if the sale or refinance was within a year.

Yes, "all the proceeds."

That percentage would then decline 20 percent annually. Three years from now, the government would seize only 40 percent of the proceeds. Thirty-five months and 25 days from now? 60 percent.

Let us pause for a moment to contemplate in awe and wonderment the size and intrusiveness of the government bureaucracy necessary to oversee this arrangement.

These ever-more complex schemes issuing from Washington are based on the premise that Congress must "do something" other than the real and obvious solution, which would be to allow bubble-fed real estate prices to fall 30 or 40 percent across the board, accepting the timely defaults of those who figured they were climbing on an ever-rising escalator.

That would allow young couples -- and some not so young -- with modest savings to again afford regular home mortgages; really afford them, without intricate government Rube Goldberg schemes and subsidies.

And why won't Washington do that? Because lawmakers -- including the Democrats, so fervently insisting they act on behalf of "the average working man" -- don't want your rent or your mortgage payment to fall. They don't want prices to continue dropping. It is an election year, after all, and that would not please a number of parties, from homeowners fortunate enough to still have some equity in their residences to the big-time bankers and home-builders who contribute to politicians' campaigns and expect something in return.

The current measure, issued by known free-market financial genius Barney Frank of Massachusetts, is scheduled for a committee vote this week and is expected to move through the House in early May. A similar bill is taking shape in the Senate.

Of course, there will have to be compromises. Goodies thrown in for this or that constituency, special exemptions for the poor and the downtrodden.

We've seen this before. Look up "Office of Price Administration," Jan. 30, 1942. And recall that at the beginning of World War II, Franklin Roosevelt sought a 100 percent tax on incomes above $25,000.