Subprime Rescue Plans: Backdoor Bank Bailouts A new report by the Center for Economic and Policy Research (http://www.cepr.net) evaluates the cost and benefits of proposed foreclosure prevention programs that fail to address the needs of homeowners who are "underwater," owing more than their homes are currently worth.
While designed to ostensibly help low-income homeowners, CEPR co-director Dean Baker finds the major beneficiaries of these plans are likely to be banks and other current holders of bad mortgage debt, who may earn tens of billions of dollars at taxpayer expense. The report (http://www.cepr.net/documents/publications/bailout_2008_03.pdf) notes that: * The proposals currently being circulated to have the government buy up or guarantee mortgage debt for homeowners facing foreclosure are likely to benefit banks more than homeowners. * Under most of these plans, it is highly unlikely that homeowners will accumulate any equity in their homes. * During the period that they remain in their home, monthly housing payments for the homeowners who are helped under these plans are likely to be close to 85 percent higher than what they would be if they rented a comparable unit. * Foreclosure rates are likely to continue to be high for the families who benefit from these plans, since most will still have zero equity in their home and little prospect for acquiring equity. * The cost per homeowner benefited is likely to be quite high, since many of the homeowners covered by such a plan likely would have held onto their homes in any case. For example, in the optimistic case where only 10 percent of the loans end up in foreclosure, the cost for each additional family who remains a homeowner will be more than $8,000. In the case of a 20 percent foreclosure rate, the cost per additional homeowner will be $30,000, and in the case where the foreclosure rate is 30 percent, the cost for each additional homeowner who remains in their home will be $75,000. This implies a very high cost in taxpayer dollars for a very questionable benefit. By comparison, the government can pay for a year's worth of child care for not much more than $6,000, or a year of health insurance coverage for $3,000. The current housing crisis was allowed to develop because those in positions of responsibility somehow failed to see an $8 trillion housing bubble. This bubble created an average of $110,000 in housing bubble wealth for every homeowner in the country, hugely distorting the housing market and the economy. It would be unfortunate if the same people who were responsible for this massive failure were allowed to compound the economy's problems with ill-conceived bailout plans. The report suggests more narrowly directed policies as an alternative. In particular, it proposes temporarily altering foreclosure rules to allow moderate-income homeowners facing foreclosure the option of renting their homes at the fair market rent. This would provide a large element of security to the millions of moderate-income families at risk of losing their homes. Furthermore, this temporary change in foreclosure rules would provide a very strong incentive to lenders (who do not want to become landlords) to negotiate terms under which homeowners can stay in their houses as homeowners. This plan also has the advantage that it requires neither government money, nor new bureaucracy. The full report can be found at http://www.cepr.net/documents/publications/bailout_2008_03.pdf. __________________________________________ The Center for Economic and Policy Research is an independent, nonpartisan think tank that was established to promote democratic debate on the most important economic and social issues that affect people's lives. CEPR's Advisory Board of Economists includes Nobel Laureate economists Robert Solow and Joseph Stiglitz; Richard Freeman, Professor of Economics at Harvard University; and Eileen Appelbaum, Professor and Director of the Center for Women and Work at Rutgers University. __________________________________________ Center for Economic and Policy Research, 1611 Connecticut Ave, NW, Suite 400, Washington, DC 20009 Phone: (202) 293-5380, Fax: (202) 588-1356, Home: www.cepr.net
_______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
