Obama's new housing plan: more government

The new plan is the same as the old plan. Obama announced his big new housing initiative today aimed at stemming the foreclosure crisis. Essentially, the government is going to lean on lenders to decrease the value of loans held by borrowers who are struggling financially.

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.

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.

The government tried to run its own lending companies before and you'll recall what happened with Fannie Mae and Freddie Mac. Now they're going to start refinancing loans for struggling families. This is the first government program in memory that forces companies not to collect money that's owed to them. With the economy tough and very few loans going out as it is, what will be the economic impact of forcing lenders to take massive losses?

And then there's this problem.

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.

If the program gets bigger, as do most government programs, a substantial portion of the lending section could become tied to the mast of the F.H.A. Any losses would inherently become the government's losses and could require massive injections of cash to keep the F.H.A. afloat -- cash the government doesn't have. In other words, it's just more creep into the economy by a government that doesn't have any money to begin with.

As the House plans to approve a plan to nationalize the entire student loan industry, how long until Obama just nationalizes the entire lending sector?