Subprime bailout? $120 billion
More than 1 million borrowers may be at risk of defaulting
on their mortgages. Assisting them all wouldn't come cheap.
By Stephen Gandel, Money Magazine senior writer
Posted: April 16, 2007
NEW YORK (Money) -- Want to pick up the check for every homeowner
who got saddled with a risky mortgage? It's a big one - on the
order of $120 billion.
Lawmakers and consumer groups in recent weeks have been calling
for assistance for those at risk of defaulting on their mortgage.
On Wednesday, Congressional Democrats led by Charles Schumer (D-N.Y.)
advocated steering hundreds of millions of dollars into nonprofits
to help the growing number of homeowners who are having trouble
paying their mortgage.
But economists and industry experts say the cost of a bailout
would be significantly more than that.
Christopher Cagan, director of research at First American CoreLogic,
says rising mortgage payments on adjustable rate loans will
force 1.1 million homeowners into foreclosure over the next
6 years. He estimates the cost of paying off the debt for those
borrowers would be $120 billion.
A spokesperson for Sen. Schumer says the senator is not suggesting
the government should pay off borrowers' loans in full. The
spokesperson says Schumer believes a mixture of counseling and
restructuring of the loans would bring down the costs of the
program considerably. He says Schumer hasn't finalized a plan,
and that Schumer has said banks and lenders should foot part
of the bill.
But even a partial bailout plan would cost far more than a
few hundred million dollars.
Larry Litton, whose company Litton Loan Servicing oversees
the payments on 400,000 subprime loans, says on average it costs
his company $16,000 to put one of its customers through a "loan
modification" program if which borrowers get moved into
loans with slightly lower rates. That would put the price tag
of a nationwide program to assist troubled borrowers at $17.6
billion, using Cagan's default estimates.
"The numbers are going to get very large," says Raphael
Bostic, a professor of economics at the University of Southern
California. "I don't think this is a feasible plan.
A historic rise in delinquency rates among borrowers with low
credit ratings has raised concerns that a record number of Americans
in the next few years will be unable to pay their mortgage. Many
of those borrowers were put into loans with low teaser rates that
are now adjusting upward, sometimes doubling their monthly mortgage
Consumer advocate groups say those loans, with steeply rising
payments, were pushed on borrowers who didn't understand the
terms. Advocates say a government bailout, even a large one,
is appropriate because regulators didn't do enough to stop predatory
lending, and because of the high cost of foreclosures.
"The cost of not doing anything would be devastating to
many communities around the country," says Lisa Rise, a
vice president at the nonprofit National Fair Housing Alliance.
Rise notes that even a $120 billion bailout would not be without
precedent. Economists estimate the federal government spent
upwards of $150 billion to resolve the Savings and Loan Crisis
of the late 1980s and 1990s.
Still economists say bailout could have the effect of causing
more defaults. "If the plan is to pay off loans when people
quit, then I plan to quit paying my loan," says Michael
Englund, chief economist at Action Economics.
What's more, some economists say a bailout could encourage
more risky lending in the future. "A bailout would validate
what some of these lenders and borrowers did, which we now understand
was reckless," says Carl Tannenbaum, president of the National
Association of for Business Economics.
"I don't think that's what we want to do.
Article at: money.cnn.com