NEW STUDY WARNS OF GOVERNMENT BAILOUT PROPOSALS FOR SUBPRIME LENDERS
AND BORROWERS

Alexandria, VA · September 18, 2007 /PRNewswire/ — Recent reports of a growing number of mortgage foreclosures have prompted a flurry of proposed new laws and regulations, including government bailouts to help prevent Americans from losing their homes. But a new study released by the National Taxpayers Union warns that many of these proposals could actually cause more harm than good.

"A government bailout is not a viable solution. The government bailout is only going to reward people who made bad decisions – both borrowers and lenders – and if we reward bad decisions, it's only going to encourage more people to make these bad decisions in the future," said study author Jacob Vigdor, Associate Professor of Public Policy Studies and Economics at Duke University.

In the first three months of 2007, two percent of the approximately 44 million residential mortgages being serviced in the U.S. were in the foreclosure process. A recent report from the Mortgage Bankers Association indicates that a number of the mortgages facing default belong to investors not actually living in these homes.

According to the report released by the National Taxpayers Union:

• "Overstretched borrowers, overaggressive brokers, and overeager lenders are bound to be hit when interest rates rise or home prices fall, especially for subprime participants. But the evidence so far doesn't indicate a "crisis." Delinquency, foreclosure, and held-for-sale rates of subprime mortgages originated in 2006 are higher than for loans originated in 2003 and 2004, but they are on par with those originated and securitized in 2000-2001.
• According to recent data, about 7 percent of subprime loans originating in 2006 were in danger of being held for sale, foreclosed upon, or going delinquent. Those not facing such problems may be squeezed, but, as Vigdor notes, "The only sure way to eliminate the high rate of foreclosures in the subprime market would be to eliminate the market entirely," depriving the other 93-95 percent of subprime borrowers of their American Dream.
• Public officials have called for foreclosure moratoriums, taxpayer-backed loans to troubled borrowers, and lender-restrictions that effectively rewrite mortgage contracts – all of which socialize the risk while encouraging recklessness by borrowers and lenders. This "moral hazard" means that "wealth is redistributed from the responsible to the irresponsible, from the ethical to the unethical," Vigdor observes.

The report adds that the solutions that could help include "streamlined (and strengthened) disclosure rules to give both loan parties a clearer sense of their responsibilities; community-level financial education programs; and, foreclosure counseling.…"

The study, What Should Government Do about the Subprime Mortgage Market? A Taxpayer's Guide, is available at www.ntu.org.

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