1. How would Congress vet such a program to avoid abuse (see “Katrina Cards”)? What are the costs associated with vetting these loans, and how many dollars will be allocated to bail out consumers? Further, how can we stop any bailout money from going to people who fraudulently misrepresented themselves in order to get loans that they couldn’t afford (thinking they could cash-out at any time for a profit)?
There is at least $40 trillion in Mortgage Debt Outstanding (as of 9 months ago). An overall delinquency rate of 5% puts $2 trillion worth of mortgage debt at risk.
For the $2 trillion in endangered loans, that translates to approximately $170 billion in mortgage payments due just this year… a potential worst-case scenario balloons the Federal budget deficit from $250 billion over the next twelve months to $420 billion.
3. While a bailout can work as a stopgap measure, how do we solve the problem of the basic fact that these people still can’t afford a mortgage on their own? If we subsidize, “until they sell,” then what incentive do they have to sell in the first place? Are we going to subsidize these borrowers permanently? What will that cost? $1 trillion, $2 trillion? If we put a time limit on the subsidy, then we are just delaying the inevitable. This might be the worst case, where billions in tax dollars go to no good end.
4. Finally, the question of fairness… I don’t own a home, and refuse to buy irresponsibly (i.e. borrow more than I can afford to repay if things go south). Now my tax dollars will go to subsidize someone else’s poor decisions to keep them in a house, while folks like me are still renting? One could argue quite successfully that those facing foreclosure should not be, and have no right to be, in the homes they’re in.
Keep in mind, that the market will correct on its own… the glut of subprime loans will be wiped out through foreclosure, and the lenders will probably suffer the most (the borrower will be freed of the obligation, in the end).