Mortgage mess: Who gets help and who pays?

Debate over what's fair and what's wise is likely to intensify as US tries to contain the crisis.

The federal government is increasingly focused on how to resolve the US mortgage mess, but the effort means grappling with controversial issues of who should receive help and who will pay for it.

Few taxpayers like to hear talk about "bailouts," especially as many tighten their own belts to deal with rising energy and food prices and falling values for their homes or stock investments.

Questions of fairness are sure to figure in the policy debate – and are already surfacing on the presidential campaign trail, on talk radio, and in congressional committee rooms. The people who might get bailed out, after all, include the same reckless lenders and often-speculative borrowers who helped cause the mess.

Should mortgage companies be forced to knuckle under so borrowers can keep their homes and avoid foreclosure? Should taxpayer money be used to help troubled banks?

To a large number of Americans, such interventions in the marketplace are wrongheaded. Still, signs of economic weakness in the past month have made a hands-off approach less likely, analysts say.

"[One] choice is to be very puritanical and say that those who have sinned must suffer. The problem is that so many have sinned that all of us must suffer," says Ed Yardeni, an economist who heads an investment research firm in Great Neck, N.Y. "The mortgage market is really way too big to [let it] fail."

As he sees it, the whole economy is beginning to suffer through a recession, caused in large measure by the decline in home values and credit availability. Policy efforts may cost taxpayers some money but could also prevent a deeper slump.

"We like to believe that we're a free-market capitalist society where everybody is responsible for their own business and financial activities," Mr. Yardeni says. "But when things start to go wrong, we ... turn to the federal government."

At the very least, some argue, help should come only with strings attached.

The Bush administration, for example, is set to unveil on Monday new proposals to improve regulatory oversight of Wall Street, alongside federal efforts to nurse the financial system back to health.

In a presidential-campaign speech on the housing crunch last week, John McCain spoke for many Americans when he emphasized personal accountability. "I have always been committed to the principle that it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers," Senator McCain said.

Any assistance, he said, should be temporary relief to responsible homeowners.

Where does the public stand on this?

Many voters have mixed feelings, an ambivalence highlighted in one of the few polls so far that has tried to explore the question of mortgage bailouts.

In the survey, by CNN/Opinion Research in December, a slim majority of Americans said that borrowers who are defaulting on mortgages "have no one to blame but themselves." Yet in that same poll, a slim majority also supported the idea of "special treatment" to help those very home­owners avoid default.

The survey found less sympathy for banks. Nearly 3 in 4 Americans did not want to see special treatment to keep financial institutions from losing money on loans that go bad.

Many of the rescue proposals under review, however, would provide some support for lenders even as they try to keep homeowners out of foreclosure.

In one sense, taxpayer-backed help is already being provided by some federal authorities – aimed especially at averting a possible meltdown in the financial industry.

"It isn't a question of whether there's going to be a bailout," says Scott Lilly, a senior fellow at the Center for American Progress, a left-leaning Washington think tank. "It's a question of what kind of a bailout."

Among the steps taken so far:

•The Federal Reserve intervened to prevent the sudden collapse of Bear Stearns, an investment bank. But the Fed took on $29 billion worth of risk from JPMorgan Chase (which plans to buy Bear). That could expose the Fed – and by extension taxpayers – to a loss. The Fed is making other low-interest loans to Wall Street firms.

•Government-sponsored housing agencies are taking on more risk to keep home loans flowing. The cost to taxpayers may be small or large, depending on how those loans go.

•The Fed has been cutting interest rates. That helps many borrowers – whose ranks include financial companies as well as homeowners. But the move could push up inflation for all Americans, and many retirees face lower income on their savings as a result.

Where McCain voiced caution about making taxpayers pay for more housing help, Democratic presidential candidates have said the government should do more.

In a speech last week, Hillary Rodham Clinton argued that the housing crisis affects most Americans, not just those at risk of losing their homes.

"In today's economy, trouble that starts on Wall Street often ends up on Main Street," she said. She added that the decline in housing prices has meant lost wealth even for homeowners who have no mortgage to pay off.

The troubles on Wall Street also mean that many consumers and businesses who never took out a subprime loan now face tougher terms on credit cards and other borrowing.

The great risk to the economy is a downward spiral, in which losses for banks tighten credit further.

If foreclosures erode household wealth and consumer confidence, home prices could overshoot on the downside just as they soared through the roof during the boom. "It's no telling how far down you go before you find the bottom in that kind of scenario," Mr. Lilly says.

That's one reason that efforts are ramping up in Congress for additional measures designed to slow the pace of foreclosures. The leading approach, for now, seems to be one backed by Rep. Barney Frank (D) of Massachusetts and Sen. Christopher Dodd (D) of Connecticut that could start moving this week.

It would have the Federal Housing Administration guarantee refinanced mortgages that make it more affordable for at-risk homeowners to avoid foreclosure.

Lilly supports this concept, but he says another approach could also spur faster restructuring of troubled loans: a tax credit to induce lenders to adjust mortgage rates downward.

In most of the plans under review, the goal is not to keep home prices from falling to a new equilibrium, but simply to avoid greater financial chaos than is already under way.

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