New Study Shows Uneven ad Unfair Distribution of Mortgage Bailout Costs and Benefits

FreedomWorks Foundation today released a new study on the costs and benefits of different policy proposals targeting the so-called “subprime mortgage crisis.” The study was conducted by Todd Sinai, The Wharton School Associate Professor of Real Estate at the University of Pennsylvania. He found that while these relief programs may help some borrowers, they do not distribute the costs and benefits equitably.

The proposals under consideration in Congress inappropriately reward people who made riskier decisions over those who made prudent decisions, exclude people who live in states that experienced an early economic downturn, benefit those with high incomes at the expense of others, and spread the costs of the program among all taxpayers or future borrowers.

The complete study, which is titled “The Inequity of Subprime Mortgage Relief Programs,” is available for free download at http://www.freedomworks.org/mortgage

FreedomWorks Foundation a national grassroots and educational organization that works to advance free market solutions to public policy questions.

Among the findings in the study:

* Programs that would freeze or reduce interest rates often leave risk-taking subprime borrowers in a better position than borrowers who made more prudent decisions such as taking out fixed rate loans initially or borrowing smaller amounts.

* Differences in foreclosure rates among states are due to exogenous economic forces and not borrower or loan characteristics; for example, prime loans are defaulting at the highest rate in the same states where subprime defaults are highest. Policies that deny benefits to households in delinquency or foreclosure disproportionately exclude those who were unlucky enough to live in the states that experienced the worst of the current economic downturn.

* The benefits of borrower relief programs will be highly concentrated geographically, but the costs will not. Federally mandated programs will be funded by taxpayers in all 50 states or through increased costs of future borrowing, but the benefits of the programs will accrue primarily to just some homeowners in some states, particularly California, Florida, New York and Texas.

* Programs to increase the conforming loan limit, including the Economic Stimulus Act of 2008, raise questions of fairness and increase the risk borne by Freddie Mac and Fannie Mae.