Wednesday, March 5, 2008

Foreclosure Plans Benefit Banks, but Do Little for Homeowners

Foreclosure Plans Benefit Banks, but Do Little for Homeowners

By Dean Baker

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Taxpayers foot the bill to finance bailout plans.

Washington DC - Many of the recent proposals to help homeowners facing foreclosure provide little relief for most of the families at risk of losing their home, according to a report from the Center for Economic and Policy Research. Under these rescues, taxpayers end up underwriting a bailout that could reap billions of dollars in profit for banks and mortgage holders.

The report, "Subprime Rescue Plans: Backdoor Bank Bailouts," examines the basic logic of these plans, focusing on the proposal offered by the Office of Thrift Supervision (OTS), to illustrate which parties stand to gain most if the government buys or guarantees bad mortgage debt.

"House prices have been falling at a 16 percent annual rate and will likely continue to fall. This means homeowners will build little or no equity throughout the duration of plans like this," said Dean Baker, author of the report.

This study shows that under these plans, homeowners will get to keep their house, but will be paying 85 percent more than if they rented a similar property. They will have little hope of accruing equity in a house that is falling in price and in which the initial terms of the mortgage have already put them underwater. Furthermore, depending on the rate of foreclosure, taxpayers could plausibly end up paying as much as $75,000 for each homeowner who stays in their home.

Under the OTS plan, falling house prices are particularly problematic, since a homeowner would need to accumulate enough equity to offset the bank's loss on the initial mortgage before they can claim a dime for themselves. Since most moderate-income homeowners only stay in their house for relatively short periods of time (the median is four years), most will accumulate no equity at all.

CEPR's analysis of these plans can be found here.


The Center for Economic and Policy Research is an independent, nonpartisan think tank that was established to promote democratic debate on the most important economic and social issues that affect people's lives. CEPR's Advisory Board of Economists includes Nobel Laureate economists Robert Solow and Joseph Stiglitz; Richard Freeman, Professor of Economics at Harvard University; and Eileen Appelbaum, Professor and Director of the Center for Women and Work at Rutgers University.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.

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