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Thread: More Wealth Re-Distribution: Taxpayers to Banks

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    Default More Wealth Re-Distribution: Taxpayers to Banks

    iTulip just got off a call sponsored by the Center for American Progress. Today they issued a report titled "Helping Families Prepare for the Rise in Subprime Mortgage Foreclosures" (pdf) by CAP's Almas Sayeed. Old news on the housing market for iTulip readers, but the part quoted below aligns well with our long standing prediction that ultimately taxpayers are going to pay to clean up the Risk Pollution left by banks who have externalized the risk of bad loans by dumping it into the financial markets, thus making the business of selling high risk loans profitable.

    The most toxic risk pollutants are the first to seep up, related to sub-prime loans, but soon enough risk pollution will spraying out of every fissure in the financial system.

    Let's guess how this is going to go: The Wall Street Investment banks and commercial banks that sold the mortgage backed securities get to keep the fees they earned, the drug addicts and old ladies the lenders went after as borrowers get stuck with loans they can't pay–not to mention Joe and Jane home owner who got talked into a badly structured loan because it was more profitable for the lender–and as with the S&L Crisis of the early 1990s, the tax payer gets stuck with the tab.
    While policymakers examine the causes of the current crisis and consider legislative and policy-based solutions to prevent such a trend in the future, it is also critically important to consider ways to stem this rising tide of foreclosures. Given the crisis that may affect communities, policymakers should consider swiftly strengthening state and federal programs that help prevent home foreclosures.

    While all states have homeownership and foreclosure prevention counseling, only a handful of states sponsor mortgage assistance programs that help qualifying families in danger of falling too far behind on their mortgage payments due to a sudden loss of income, illness or death in the family. Increased federal assistance could expand these programs and enhance those foreclosure prevention programs that do not provide loans. Among the steps policymakers should consider are:
    • Federal grants to expand and enhance current mortgage assistance and foreclosure prevention programs and low-interest mortgage assistance to eligible borrowers.
    • Federal funds to target key cities and states facing the highest risk of mass foreclosure.
    • Provisions to ensure federal agencies assess the effectiveness of each program every three years.
    • Strengthen programs that aid families while their mortgage contracts are renegotiated or the property is sold on the market so that the homeowners’ credit ratings are salvaged, allowing for the possibility of future homeownership.
    This paper details why the steps briefly outlined above would help ameliorate the current rise in foreclosures. The paper will first examine the causes of the crisis and then look at the structure of state-funded foreclosure prevention programs to illustrate how cost-effective federal support for these programs—particularly in key states—could help families facing foreclosure stay in their homes.

    While foreclosures are sometimes unavoidable, it is in the best interests of our communities and overall economy to support those who have embraced homeownership and work to prevent foreclosure. After all, homeownership is an important step in the creation of stable and secure communities. Yet, homeownership is also a step that is especially difficult to take for those without access to traditional home lending products. When assets and wealth are better distributed and families are more financially secure, this, in turn, enhances opportunities for everyone and contributes to the country’s overall economic security.
    AntiSpin: In other words, taxes and more taxes and more Federal debt. The folks over at CAP have their hearts in the right place, but the approach of using taxpayer money to solve the foreclosure problem is misguided. That only encourages the banks to do it again. I have a better idea. How about this time Goldman Sachs, J.P Morgan, Merrill Lynch, Citibank, BoA, et al, clean up their own mess and pay for the bailout instead of taxpayers? Sure, the cost might put some of these banks out of business, but who cares? Other better run banks will take their place.

    The other news organizations on the call were New York Times, LA Times, etc. Judging by the questions, the MSM seems symapethic to the taxpayer bailout approach. Looks like iTulip and a few others are going to have to lead the charge to make sure the Risk Polluters pay their fair share.

    Otherwise,
    get ready for a lot more of this:
    Senate Weighs Aid to 2.2 Million Subprime Borrowers
    March 13, 2007 (Bloomberg)

    U.S. lawmakers will have to consider providing aid to about 2.2 million subprime mortgage borrowers who are at risk of defaulting and losing their homes, Senate Banking Committee Chairman Christopher Dodd said today.

    "The impact of losing 2.2 million homes I suspect will be in a lot of areas of our cities and towns that are already pretty hard hit, so we clearly want to look at that and legislate,'' Dodd, a Democrat from Connecticut, told reporters in Washington after a speech to the National League of Cities.

    [snip]

    Federal aid "would come at a cost,'' said Douglas Duncan, chief economist at the Mortgage Bankers Association. ``It has to be paid for and the question is would the 34 percent of homeowners who have no mortgage be willing to pay taxes to support the bailout of people who traditionally have not managed credit well?''
    Again, the issue is framed the wrong way. The problem is not one set of taxpayers bailing out another, it's taxpayers bailing out the banks that made money selling the loans.
    Last edited by EJ; 03-13-07 at 05:01 PM.

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