Critics complain about plans to help real estate foreclosure victims

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Lewis Uhler, president of the National Tax Limitation Committee, has criticized proposals to bail out the so-called "subprime" lending industry. With potential losses hitting $100 billion, he said "Borrowers, lenders, and investors must be held responsible for their own mistakes."

During the rising real estate market, lenders provided mortgages to poorer credit risks. The so-called "subprime" lending market ran more than $600 billion last year alone. Investors snapped up subprime mortgages bundled into so-called collateralized debt obligations.

Unfortunately, the real estate slowdown has "turned subprime lending into subprime returns," explained Uhler. Homeowners are losing their homes, lenders are going under, and investors are losing money.

"When the subprime lenders were making a bundle during the red hot market, did they offer to share their profits with taxpayers? Of course not. But now that things have turned ugly for them, they want taxpayers to bail them out."

Massachusetts Gov. Deval Patrick has proposed a new $250 million fund to refinance bad mortgages. He would use money from Fannie Mae, the national mortgage agency backed by the federal government, and the Massachusetts Housing Finance Agency. New York Mortgage Agency officials are planning a $100 million program. A similar proposal is being considered in Pennsylvania.

Legislation before Congress would allow the Federal Housing Administration to offer 40-year-loans to bail out overstretched homeowners. The Federal Reserve is also being pushed to drive down interest rates.

"These initiatives are all bad policy," observed Uhler. "Attempting to protect borrowers, lenders, and investors from their own folly would make us all worse off."

Uhler added that in 2007, the American people didn't stop working for government until July 11, known as Cost of Government Day. "Sticking taxpayers with the subprime bill would make us all work even longer for government, while at the same time responsible homeowners also would suffer."

Uhler also noted that only 1 in 20 homeowners has a subprime loan. "The rest of us would be paying for a few people's mistakes, and diverting good money to bad borrowers means fewer loans would be available for good credit risks."

Manipulating interest rates also risks spurring inflation, and, "A bailout would set an awful precedent," Uhler added. Market adjustments are painful but powerful. The message is simple: Watch what you are doing.

"Every time politicians bail out an industry, they encourage more people to be more irresponsible in the future," Uhler warned. Nor would future problems be confined to the housing market. "The breakdown of the subprime lending market will be expensive, whatever we do. But we shouldn't make the situation worse by sticking taxpayers with the problem," he said.

Related stories:

Tax relief proposed for homeowners in foreclosure

Congress considers changing mortgage interest deduction

Homeowners in foreclosure might face an income tax liability

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