Citizens Against Higher Taxes Opposes Taxpayer Bailout of Mortgages

Senate FHA vote sends wrong message to responsible consumers

Simply put, taxpayers shouldn’t be forced to bail out the lenders who helped homeowners dive into the deep end of the financial pool, nor should taxpayers be obligated to rescue investors who made poor financial decisions. We didn’t bailout people who bought tech stocks at the height of the dot com boom, why should this be any different?

Hershey, PA (PRWEB) December 18, 2007 -- Citizens Against Higher Taxes announced its opposition to taxpayer bailouts of subprime mortgages. Such an action would be nothing more than a new taxpayer subsidized program that rescues disreputable mortgage, banking or brokerage firms at the expense of working families, taxpayers and responsible homeowners.

Data from the Mortgage Bankers Association shows that a bailout is unnecessary. The vast majority of homeowners are making their mortgage payments on time, including subprime borrowers. And homeowners who feel they have been duped or defrauded into signing bad mortgages have the right to seek redress in the courts.

“Simply put, taxpayers shouldn’t be forced to bail out the lenders who helped homeowners dive into the deep end of the financial pool, nor should taxpayers be obligated to rescue investors who made poor financial decisions. We didn’t bailout people who bought tech stocks at the height of the dot com boom, why should this be any different?” said Jim Broussard, Executive Director of Citizens Against Higher Taxes.

Real estate markets are cyclical in nature, and while downturns are unpleasant, they are always followed by a recovery. These downturns happen to varying degrees which we saw in the early nineties and as recently as 2001-2. Using a taxpayer bailout to counteract this natural cycle will only prolong the downturn and exacerbate its impacts.

On Friday, The US Senate voted for an FHA modernization bill that would do just that, attempting to meddle in the market and mask its taxpayer bailout proposals. Like most bailout schemes, elements of this bill set a dangerous precedent at the cost of taxpayers – most notably it increases loan limits and reduces down payment requirements.

One portion of the legislation raises the FHA loan limit by over $50,000 to $417,000. However, the median home price in the US is only $220,000 according to the National Association of Realtors. In Pittsburgh the median price is $127,700 and in Philadelphia it is $243,000. There is no evidence to show the increase is necessary.

“The proposal to increase loan limits is a solution in search of a problem. The Senate proposal to increase FHA loan caps won’t help average homeowners; it helps the mortgage companies and people who are over-extended on their McMansions evade fiscal reality,” said Broussard.

Taxpayer bailouts encourage reckless financial behavior. If consumers can count on being bailed out by the government, it eliminates all the risks associated with loan delinquency ending the motivation of borrowers on the verge of delinquency to pay their mortgage. In some cases, when finances are precarious, it may persuade borrowers to default in order to reap the financial reward of the bailout.

This problem is illustrated by another element of the FHA bill that proposes to cut the down payment requirement in half from a mere 3% of the loan value to a meager 1.5%. Down payment requirements ensure that a borrower has an ad­equate personal “stake” in his or her home. When that stake is re­duced the risks and consequences of not paying your mortgage are virtually eliminated.

“We should be requiring homeowners to have a greater stake in their home ownership, not less. The less the homeowner has at stake, the more taxpayers are at risk. That isn’t good policy any way you slice it,” said Broussard.

While well intended, the FHA falls short of good public policy and is dangerously close to a full blown taxpayer bailout. Citizens Against Higher Taxes is urging Congress to abandon the bailout elements of the FHA modernization bill.

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