Do nothing, congress.(HOUSING)(real estate bills)

DEFYING a White House veto threat, the U.S. House of Representatives passed a pair of housing bills that would reward foolish lenders and borrowers, weaken the reputation of American securities, and punish renters.

The centerpiece of the first bill is a $300 billion mortgage-insurance fund that would allow the Federal Housing Administration to insure an estimated 500,000 troubled home loans, at a cost to taxpayers of $2.7 billion. Under this bill, lenders can get the FHA to insure a souring loan by agreeing to write down the loan's value by as much as 15 percent. This works out well for those lenders who let their standards plummet as housing prices soared, as well as for borrowers who took out loans they couldn't afford. It doesn't work out so well for taxpayers who exercised better judgment.

It doesn't work out well for investors in mortgage-backed securities, either. These investors enter into contracts that specify the circumstances under which loan servicers can work out deals with cash-strapped borrowers. These contracts allow investors to know approximately how much their investments are worth. But the Democrats' bill would throw even this small measure of certainty out the window, by giving broad protection from legal liability to loan servicers who write down mortgages in violation of these contracts.

As the Competitive Enterprise Institute's John Berlau has noted, middle-class investors who own mortgage-backed securities through their 401(k) accounts and mutual funds would lose billions. What's worse, giving loan servicers a free hand to alter the terms of these contracts would contribute to an atmosphere of uncertainty on Wall Street at a time when uncertainty over the value of debt-backed securities is fueling a credit crunch.

A separate housing bill would provide states with $15 billion in grants and loans to purchase foreclosed homes. The ...