At best, the only thing to be gained from a bailout of subprime mortgage borrowers is time.
If John and Jane Doe can't afford the "teaser" interest rates of 7 to 9 percent that lured them into the subprime market in the first place, what condition will they be in three to five years from now when frozen interest rates thaw and rates climb to 11-13 percent? Tinkering with the market will only draw out the pain for a longer period of time.
The Treasury Department has no good options. It cannot stand idly by as thousands of Americans lose their homes. Foreclosures, after all, doubled in October compared to last year. To compound problems, the housing market is deteriorating and there is growing concern about higher short-term borrowing costs, which can crimp economic growth.
Understanding all that, a government bailout is an affront to people who have managed their credit carefully, qualified for traditional mortgages and met their financial obligations. Why, as taxpayers, should they be further burdened by the Treasury Department's proposal to allow state and local governments to "temporarily" exempt taxes on bonds issued to help refinance subprime borrowers?
It's a bitter pill for people who carefully manage their money to be called upon to bail out consumers and lending institutions. Some borrowers were sold these loans by unscrupulous lenders who likely knew that borrowers who scarcely qualified for entry rates probably would not be able to manage higher rates over the life of the loans. But others sought these loans for "cash-out" options. Should they be eligible for a bailout?
How would a bailout program be administered? Who would qualify?
Treasury Secretary Henry Paulson says the focus of the restructuring deal are borrowers with steady incomes and relatively clean payment histories.
But some industry analysts are skeptical about the government's ability to handle thousands of cases with a few simple principles. One legitimate concern is loans would be restructured for people who don't need it.
While a bailout may temporarily calm one segment of the economy, it can do little to stave off the correction in home prices. The bigger question is what happens three to five years from now when mortgages reset among borrowers who have been unable to refinance subprime mortgages? Would we see another bailout that encourages yet more reckless behavior on the part of borrowers and lenders?