By Bailey Harris

House Financial Services Committee Chairman Barney Frank, the sponsor of a new proposal meant to address the mortgage crisis, admits that some people made the mistake of borrowing beyond their means in recent years, but insists that these people still need help.

Frank's proposal involves using the FHA to take on up to $300 billion in refinanced loans and is heavily supported by Democrats and a growing number of Republicans. President Bush is firmly against the legislation and has the vast majority of Republicans and a few Democrats on his side.

Bush's main issue with the Frank-Dodd plan boils down to the massive risk the government, and in turn the taxpayers, would take on. Under the plan, the FHA would be allowed to loosen standards so that people with bad credit and massive amounts of debt can qualify for government-backed loans.

For the plan to work, lenders will have to take a loss on what is owed. For example, if a homeowner owes $200,000 on a house that is now only worth $150,000, the homeowner's lender would have to agree to cut what is owed to $127,500--85 percent of the home's actual value.

The FHA would back the newly refinanced loan, which means that the lender gets to get the bad loan off its books and avoid what could be a costly foreclosure.

How Many People Will This Help?

The House Financial Services Committee is estimating that this bill will help 1.5 million homeowners. I'm not sure where the estimate is coming from, but it is safe to assume that it is an overestimation--just like the one made by Bush in regards to the FHA Secure program, which was supposed to help half a million people by the end of the year. (So far, the FHA Secure plan has helped a paltry 2,000 delinquent borrowers.).

Frank's bill may help more people than the FHA Secure plan, but only because it is designed to bail out lenders. The lenders, who shouldn't have been making such crappy loans in the first place, get to transfer risk to the taxpayer. All they have to do is eat a little bad debt in return.

Versus asking how many people this will help, the better question may be: how many people will this hurt. Although foreclosures do cause trouble for neighborhoods and the economy, Congress is essentially asking the 96 percent of people who played by the rules to put their necks on the line for the four percent who didn't.