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Subprime Bailout: Taxpayer toll
Those who oppose mortgage bailout proposals say the cost
of helping troubled borrowers and lenders will come out
of their pockets. But that's not always the case.
By Jeanne Sahadi, CNNMoney.com senior
writer
NEW YORK (CNNMoney.com) -- Lend a hand to distressed
homeowners? No way, say many, who worry the tab will
come out of their pockets as taxpayers.
Some proposals, it's true, would be directly financed
by taxes. For example, the Senate voted in favor of an
appropriations bill that earmarks $100 million to provide
housing counseling for those facing foreclosure.
But some proposals would cost taxpayers money only in
a worst-case scenario.
The worst case for FHA and Fannie and Freddie
Taxpayer dollars, for instance, don't directly support
the Federal Housing Administration's loan insurance
program - the premiums paid by homeowners with FHA
loans do.
But moves to liberalize FHA loan guidelines concern
some because the government would presumably step in
if the FHA stumbles after taking too much risk.
In the wake of the credit crunch, the agency instituted
FHASecure to loosen guidelines to make more FHA loans
available to homeowners in trouble. A modernization bill
under consideration would allow the agency to insure
bigger loans and loans with 0 percent down.
Those provisions would expose the FHA to more expensive
and more risky loans. If too many of those loans fail,
the thinking goes, the government would step in with
taxpayer money.
"While the subprime market has witnessed considerable
stress, the losses in that market are being borne by
investors. Were these same losses to occur in FHA programs,
it is likely they would be borne by the taxpayer," said
Richard Shelby (R-AL), ranking member on the Senate Banking
Committee, in a July hearing.
Other proposals on the Hill focus on Fannie Mae and
Freddie Mac. The agencies guarantee the purchase and
trading of mortgages, which helps promote homeownership.
Fannie and Freddie can't buy loans valued above $417,000
and some proposals call for an increase in that limit.
Some proposals also call for higher limits on the amount
of mortgage assets that Fannie and Freddie buy and keep
in their own portfolio, and earmarking a portion of the
raised limit for the purchase of subprime loans.
Fannie and Freddie are "government sponsored," not
government funded, but there is an implicit understanding
that should Fannie and Freddie falter, the government
would feel pressure to help out.
"As a purely legal matter, it's not required to.
But it's bailed out private companies before," said
Patrick Fleenor, chief economist for the Tax Foundation,
a nonprofit research group that advocates for lower taxes.
Some tax dollars well spent
Some bills would impose more stringent regulation
on mortgage lenders and brokers, and administering
such oversight would cost the government money.
But even those who oppose tax-funded bailouts say more
stringent regulations is a good idea.
"Government cannot stop the housing market from
expanding and contracting, but it can make future contractions
less painful ... [by holding] lenders and brokers to
higher, more uniform standards during loan origination," wrote
economics and public policy associate professor Jacob
Vigdor of Duke University in a paper critical of most
bailout proposals.
What likely won't hit taxpayers
There is a bill that would amend the bankruptcy code
to let judges reduce the value of a mortgage to the
value of a home for Chapter 13 filers. That cost would
be borne most directly by lenders. But lenders could
price that risk into the price of loans, making it
more expensive for consumers to buy a home.
One proposal, while directly tax related, is not likely
to affect most taxpayers. The Mortgage Forgiveness Debt
Relief Act (MRDA) would exempt homeowners paying income
tax on any mortgage debt their lenders forgive. That
would reduce federal tax revenue by an estimated $1.3
billion over 10 years, but another provision in the bill
would actually raise more money, making the bill revenue
neutral, according to the Joint Committee on Taxation.
That money-raising provision would reduce the amount
of capital gains some second-home owners may exempt from
tax when they sell that second home.
Some initiatives are not at all funded by taxpayer dollars.
One example is that the newly formed alliance among a
select group of mortgage lenders, servicers and housing
counselors brokered by Treasury Secretary Henry Paulson.
The alliance will coordinate efforts between servicers
and counselors to provide subprime loan "workouts," which
can include lowering the interest rate on a loan, spreading
out past-due payments over the life of the loan or a
short-term repayment plan.
Another example is the Treasury-facilitated debt rescue
fund financed by three major banks to enhance liquidity
in the short-term credit markets.
But those who oppose bailouts say it's as much about
principle as it is about cost.
"Using government power to absolve borrowers or
lenders of their responsibility, even without the direct
use of taxpayer dollars, is likely to be costly to many,
hurtful to the innocent and helpful to those whose avarice
and overreaching contributed so much to the creation
of this situation," Vigdor wrote.
Those who are more supportive of such efforts say the
cost to everyone could be much greater by not doing anything.
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