Busted: Bankers and The Global Economy

May 12, 2008

Paper Tiger Taxpayer Bailout Plan at 1.7 Billion

Filed under: banking — Tags: , , , , , , , , , — digitaleconomy @ 9:12 am

The taxpayer cost of the mortgage refinancing should be limited to about $1.7 billion according to U.S. government sources. The problem is that few that qualify will actually be helped.

The proposal, authored by House Financial Services Chairman Barney Frank, passed the House with a 266-154 margin, with 39 Republicans joining virtually all Democratic House members to support the measure. The Bush Administration and many members of Republican leadership oppose the bill and are proposing other measures.

Congress feels that the country should be reassured by this paper tiger measure. The reality of the plan dictates otherwise. Very few at-risk homeowners will be able to get help. Because of the limited scope of the proposal, the cost to taxpayers is projected at less than $2 billion. The Congressional Budget Office is content with the limited exposure.

1. The plan dictates that the Federal Housing Administration would guarantee a new loan if a mortgage holder accepts a write-down of at least 15% of the property’s current appraised value. The plan does not address the real crisis in any real measure.

2. Nearly a million home buyers will be blocked from help because they have second mortgages. Second mortgage lenders are in danger of losing most, if not all of their money. As a result, they may not agree to the refinancing.

3. Roundly 500,000 home buyers have problems such as job loss, illness or divorce that make it impossible to afford even lower payments of a refinanced loan which will disqualify them.

4. Almost one million home buyers might choose not to use the program because of the costs involved to get the government guarantees. Government guarantees under the plan include a promise to share any future gains in the home’s value with the FHA.

5. Government experts estimate that 35% of those who get help under the program will still fall into foreclosure.

Almost a year has passed since the reality of the subprime mortgage disaster became apparent. The government has taken responsibility, while continually failing to develop a reasonable plan to resolve or resist the current foreclosure crisis. The bankers that played a major role in the debacle have failed to support countermeasures and have failed to work diligently to avert the situation staring them in the face. Instead, in typical measure, bankers and business aligned with the industry have depended on others to bail them out of their own folly as the national economy crumbles.

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