Congress Should Beware of Proposals to Bail Out Subprime Market, Taxpayer Group`s Study Shows

 Congress is considering a number of measures to address home foreclosures, many of which are aimed at subprime mortgages. These loans are offered to lower income borrowers, particularly those whose credit history, income level, and net worth make them poor candidates for more traditional mortgages. Recently, Congressional leaders have even raised the possibility of appointing a mortgage "czar." Bills are also under consideration to shift risk from subprime lenders to taxpayers, by allowing the Federal Housing Administration to insure riskier mortgages, and allowing Fannie Mae and Freddie Mac, two government-sponsored enterprises, to buy riskier mortgages.

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But a recent study by the National Taxpayers Union (NTU) warns that such actions could do more harm than good. "With news of subprime mortgage foreclosures, elected officials are crafting bailout plans that would put taxpayers on the hook," said NTU Vice President for Communications Pete Sepp. "If ever there were a way to turn this problem into a full-blown crisis, overbearing government intervention would be the catalyst leading to catastrophe."

NTU`s Sepp has lobbied, provided analysis, and testified before Congress on financial industry issues since the early 1990s. As such, he drew parallels to the current subprime issue with previous policy approaches, and contended that market intrusion from government would be a classic instance of creating "moral hazard." "Forcing taxpayers to pick up the tab for home foreclosures, or making taxpayers more vulnerable as lenders of last resort, will only worsen the situation," he noted.

The study`s author, Jacob Vigdor, Associate Professor of Public Policy Studies and Economics at Duke University, singled out as especially dangerous "proposals that promise to rescue lenders and speculative borrowers from their own bad decisions, taking risk off their shoulders and assigning it to taxpayer-backed government agencies and enterprises." Vigdor added that, "very little, if any, of the assistance promised in these bailout proposals would trickle down to honest borrowers facing difficulties in making their mortgage payments. Lenders who misled these borrowers would be paid off, while the borrowers themselves continue to face the daunting prospect of paying off a loan that they truly could not afford."

According to Vigdor, "these policies effectively reward the actors most responsible for creating turmoil in the subprime lending market, and create incentives for unscrupulous lenders and borrowers to take even riskier actions in the future." The Harvard-educated economist, renowned for his insight on housing finance, analyzed data and trends to conclude that any reform must "carefully balance a government role for regulation with the need for borrowers, lenders, and investors to bear responsibility for their own actions."

The 362,000-member NTU is a citizen group founded in 1969 to work for lower taxes, less wasteful spending, and accountable government. The study, "What Should Government Do about the Subprime Mortgage Market? A Taxpayer`s Guide," is available at http://www.ntu.org/.

Video: http://www.prnewswire.com/mnr/ntu/29760
Source: National Taxpayers Union

CONTACT: Pete Sepp, Vice President for Communications of National
Taxpayers Union, +1-703-683-5700, pressguy@ntu.org

Web site: http://www.ntu.org/