Stop the $7 Billion Dollar Subprime Bailout

Not having heard the term "exploding ARM" before, but liking it on first sight in Senator Charles Schumer's report on subprime lending, there is much less to like in the conclusion of the report where it is learned that "it pays to prevent foreclosures".

A Joint Economic Committee report titled "Sheltering Neighborhoods from the Subprime Foreclosure Storm" was released yesterday and it seems that Congress is intent on fixing the problem with subprime mortgages, where, over the last few years, people who couldn't afford homes were permitted to purchase them.

Now that they can't make their mortgage payments, elected officials see fit to help them stay in their unaffordable homes for the greater good - it wasn't hard to see this coming.

Here's the first page of the report which came to me via email - as soon as a link can be located, it will be posted here (.pdf) so readers can see for themselves how their tax money may be spent.

The report has lots of maps and tables along with the requisite "tightening of lending standards", but it's the bailout talk that should be examined closely.

What kind of message does it send when there are no consequences for irresponsibility by lenders, regulators, and borrowers?

Conclusion: It Pays to Prevent Foreclosures

Foreclosures are costly – not only to homeowners, but also to a wide variety of stakeholders, including mortgage servicers, local governments and neighboring homeowners. The high costs of foreclosures – up to $80,000 for all stakeholders combined – present a strong incentive to prevent them. In their efforts to respond to the subprime foreclosure crisis, policymakers may want to consider enacting some combination of the following measures to prevent future foreclosures that may come as a result of a high concentration of unsuitable loans in areas of economic downturns, areas of steep housing market slumps and areas of lax regulatory enforcement.

Increase Federal Support for Local Foreclosure Prevention Programs.
In the short term,local community-based non-profits may be best positioned to implement foreclosure prevention programs. State and national organizations exist throughout the country to both enhance homeownership and prevent foreclosures. Many of these programs have been successful in coordinating a wide range of services for borrowers in order to help restructure unsuitable loans, aid borrowers with foreclosures prevention counseling or initiate legal action against the most gregious predatory lenders. 49 Some of these programs also provide financial assistance, such as low-interest bridge loans to help borrowers recover from delinquency. To assist existing community-based nonprofits with increasing caseloads, the federal government should work with nonprofits with proven track records and consider providing them with enhanced funding.50

Estimates suggest that foreclosure prevention costs approximately $3,300 per household -- substantially less than the nearly $80,000 in costs of foreclosure described above.

50 Ana Moreno, Cost-Effectiveness of Mortgage Foreclosure Prevention, Family Housing Fund, November 1995.

Let's see. At $3,300 per household that would be $3.3 billion for every million homes that are saved. Since the Center for Responsible Lending estimates a total of 2.2 million homes of subprime borrowers would otherwise be destined for sheriff's sales, that would put the upper limit just over $7 billion.

The really bad news is that the $3,300 figure is based on a paper that is already 12 years old and likely underestimates the cost by a wide margin. Add to this the possibility of Alt-A loans being added into the mix later this year and the real implementation cost would probably be tens of billions of dollars or more.

Like the phrase named after Alan Greenspan, the former Fed chairman who got this whole housing mess started, maybe this plan will someday be called the "Schumer put" as in, "Go ahead and speculate, somebody will be there to save you if things go awry".

Now is probably a good time to visit Patrick's Stop the Subprime Bailout page, follow the meticulously written instructions and let your elected representative know how you feel about this.