More government encouragement of irresponsible behavior

President Obama continues the traditional government policy of rewarding irresponsible behavior:

The Obama administration on Friday will announce broad new initiatives to help troubled homeowners, potentially refinancing several million of them into fresh government-backed mortgages with lower payments. ...

The administration’s earlier efforts to stem foreclosures have largely been directed at borrowers who were experiencing financial hardship. But the biggest new initiative, which is also likely to be the most controversial, will involve the government, through the Federal Housing Administration, refinancing loans for borrowers who simply owe more than their houses are worth.

About 11 million households, or a fifth of those with mortgages, are in this position, known as being underwater. Some of these borrowers refinanced their houses during the boom and took cash out, leaving them vulnerable when prices declined. Others simply had the misfortune to buy at the peak.

So, if you bought a house with a large down payment, you reduced your risk of ending up underwater, and reduced your chance of government help. If you bought your house with no money down, you easily ended up underwater, and therefore get government help.

If you didn't cash out your home equity during the bubble, you're less likely to be underwater, so you don't get help. If you did cash out your home equity during the bubble, and bought lots of cool stuff, then you do get government help.

This is not just a subsidy for irresponsible homeowners, it's also a subsidy for banks holding bad loans:

Many of these loans have been bundled together and sold to investors. Under the new program, the investors would have to swallow losses, but would probably be assured of getting more in the long run than if the borrowers went into foreclosure. The F.H.A. would insure the new loans against the risk of default. The borrower would once again have a reason to make payments instead of walking away from a property.

Let's not also forget that the FHA is already on very shaky financial ground. Any FHA losses will come out of the pockets of the American taxpayer:

This much was clear, however: the plan, if successful, could put taxpayers at increased risk. If many additional borrowers move into F.H.A. loans, a renewed downturn in the housing market could send that government agency into the red.

This plan is just a way of shifting the burden of loss off the backs of those who engaged in irresponsible behavior, and onto the backs of taxpayers. Of course, if the housing market kept going up forever, homeowners and banks would have pocketed all of the gains. Homeowners who made the smallest down payments would have gotten the highest return on equity. Heads they win, tails we lose.