NO BAILOUTS FOR BORROWERS
December 4, 2007
A taxpayer bailout of distressed homeowners would be expensive, unfair to the vast majority of homeowners and renters who have made prudent financial decisions, and set a troubling precedent that would invite reckless behavior in the future, says Andy Laperriere, a managing director in the Washington office of ISI Group.
- The primary argument for a taxpayer bailout is based on a myth -- that subprime borrowers are falling behind on their mortgages because interest rates on their adjustable rate mortgages have spiked, making their monthly payments unaffordable.
- In fact, the vast majority of delinquent subprime borrowers are still paying introductory teaser rates (about 8 percent on average, a below-market rate for borrowers with checkered credit histories).
- In other words, for most of these borrowers, their monthly payments have not yet gone up.
It is true that many subprime borrowers were sold a toxic mortgage by unscrupulous mortgage brokers. However, the primary reason for the spike in subprime delinquencies so far is that many subprime borrowers have taken on more debt than they can pay back using any reasonable interest rate, says Laperriere.
According to Credit Suisse:
- The typical subprime mortgage starts at 45 percent of pre-tax income -- before the rate resets.
- After the first reset, the mortgage payment generally increases to about 55 percent of gross income (and can go up from there).
- Many of these loans can't be restructured or modified; the only way the most distressed subprime borrowers will be able to stay in their homes is if the lender or the taxpayers forgive a significant amount of their mortgage debt.
Since so many borrowers -- and not just subprime borrowers -- would need to receive substantial debt forgiveness to make their mortgages affordable, a bailout fund would be expensive, likely costing taxpayers hundreds of billions of dollars, says Laperriere.
Source: Andy Laperriere, "No Bailouts for Borrowers," Wall Street Journal, December 4, 2007.
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