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Housing bailout gains backers

Demand for aid to homeowners facing foreclosure grows as the mortgage crisis roils the economy.

March 22, 2008|Michael A. Hiltzik | Times Staff Writer

From Wall Street to Capitol Hill, calls are growing for the government to get into the mortgage business as the only way out of the housing crisis roiling the economy and the financial markets.

Proposals to shore up tottering home loans with taxpayer money are gaining traction in Congress and moving to the forefront of presidential politics.

Federal Reserve Chairman Ben S. Bernanke has also called on the lenders themselves to reduce the amount of principal that troubled homeowners owe on their loans.

The Fed has recently taken a series of aggressive steps to assist financial companies staggered by the credit crunch -- including providing a $30-billion short-term loan to JPMorgan Chase & Co. to facilitate its purchase of struggling Bear Stearns Cos.

Democratic contender Sen. Hillary Rodham Clinton cited that action this week in calling for a new initiative to provide $30 billion to help homeowners.

"If we can extend a $30-billion lifeline to avoid a crisis for Wall Street banks, we should extend at least $30 billion in immediate assistance to at-risk communities and families facing foreclosure," Clinton's campaign said in a statement.

But while the Fed can help lenders and the investment industry, it has little authority to help individual borrowers or to force their lenders to modify repayment terms so that strapped borrowers can stay in their homes. That is putting pressure on Congress to step into the breach.

"It does seem increasingly likely that we're headed toward a compromise on taxpayer assistance to prevent a greater number of foreclosures," said Stuart G. Hoffman, chief economist at PNC Financial Services Group.

Thus far the Bush administration has resisted anything that resembles a taxpayer- financed homeowner bailout. Instead, it has placed its faith into several programs that encourage lenders and distressed homeowners to work things out voluntarily.

And Treasury Secretary Henry M. Paulson Jr., former chief executive of investment bank Goldman, Sachs & Co., has said he believes the housing bubble should be allowed to work itself out naturally.

Critics say that's tantamount to bailing out the big players while throwing the little guys to the wolves, and that a more evenhanded approach will make any government action more broadly palatable.

"Some say, let market discipline rule," said Jared Bernstein, an economist at the liberal Economic Policy Institute in Washington. "But some banks are too big to fail, and some homeowners don't deserve to lose their shirts."

Still, a homeowner "bailout" could be a political minefield. Any relief program will have to be carefully fashioned to focus only on deserving homeowners whose financial ills are no fault of their own. Otherwise, the program could face a backlash from voters who believe they played by the rules only to have their tax money paid out to the imprudent or the crooked.

"All the talk about bailing people out is really a slap in the face of those of us who have been financially responsible," said George Sylak, 43, a television producer from Venice who is renting his home. "Now the federal government and the candidates are saying, 'You didn't need to be responsible.' "

Others contend that what looks on the surface like a rescue of homeowners would really be a bailout of lenders who unscrupulously enticed borrowers into loans destined for trouble.

"If businesses don't want to modify their own loans, then letting the government do it just means the government taking on the risks that the lenders don't want," said Marc Itzkowitz, a Palo Alto software marketing executive.

Itzkowitz says he has remained a renter because he thought that buying a home in a superheated market seemed "imprudent."

"Not letting people meet the consequences of their actions just means that there won't be a lesson for them, and 10 years from now we'll be doing this again," he said.

Many on Wall Street are impatient with the argument that offering homeowners and lenders taxpayer-financed relief will only encourage them to take similar or greater risks in the future, a concept known as "moral hazard."

"If Washington gets off its high 'moral hazard' horse and moves to support housing prices, investors will return in a rush" to prudent government- and agency-backed securities, wrote Bill Gross, chief investment officer of the Newport Beach-based bond investment firm Pacific Investment Management Co., or Pimco, in a recent note to clients.

Some economists say the housing crisis is reaching such magnitude that it threatens to push the economy at large into a severe recession, a situation that would make the "moral hazard" debate seem irrelevant.

Nationally, foreclosures in February ran nearly 60% ahead of the figure a year earlier, according to Irvine-based RealtyTrac, a foreclosure-tracking service. More than 223,000 homes received loan default notices, the first step toward a foreclosure, the firm said.

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