FORTUNE — The much-written about federally sponsored mortgage refinancing program that started in 2009 fell far short of its aim to help 3 to 4 million homeowners refinance into a better mortgage. It hasn’t worked out nearly as well as hoped, with 894,000 mortgages refinanced so far under the Home Affordable Mortgage Program (HAMP).
The new plan from the administration should get a lot more homeowners into cheaper mortgages, but in doing so rewards the so-called liar loans that helped spawn this mess to begin with.
Part of the reason HAMP flopped was because homeowners had to provide income tax statements, pay stubs and bank records to prove they had the finances to afford a mortgage. That was a problem since a vast swath of homebuyers (including me) got mortgages without ever having to do much more than write down annual income on a form.
Under the new plan, renamed to give it the more appealing acronym HARP (for Home Affordable Refinancing Program), you can get a loan for up to twice the current value of your house at current interest rates, currently a near-historic low of 3.94% for a 30-year fixed mortgage. Like one of those late night commercials on TV, Uncle Sam doesn’t care if you have good credit, bad credit, no credit or if you own your own car: if you have a mortgage you can get it refinanced, provided you weren’t late more than once in the past 12 months on your existing loan. In short, the government has gone from wanting you to prove you deserve a mortgage — like what it should have demanded from the mortgage industry in the boom times — to a financial version of don’t ask, don’t tell.
It’s not quite as bad as I make it out to seem. For one, the program only allows refinancing of mortgages already guaranteed by the government through Freddie Mac and Fannie Mae and you can’t get a loan for more than your existing mortgage. By lowering mortgage payments, it presumably lowers the risk on the government’s balance sheet. Of course, new 30-year loans replacing loans with fewer years left pushes up risk. The plan’s incentive to get people to take a shorter loan term by eliminating some fees is a smart way to counteract that.
But consider this: if you have more than 20% equity in your home, you can’t participate. If you bought smart, paid 20% or more down and didn’t pull out equity to fuel a buying binge back in 2006, there is no help here.
Like with the bailout of Wall Street firms before it, it turns out this bailout ultimately benefits those who stretched the truth and acted irresponsibly.