The Housing Bailout Backlash

With the national housing crisis gathering steam, a growing number of lawmakers and economists have signaled increasing support for a bailout of struggling homeowners. But while images of vacant houses and panicked borrowers have triggered sympathy—not to mention political enthusiasm—for a taxpayer-funded rescue, objections to big-government intervention have created a small but spirited backlash against it.

“What I support are the principles that have made us the most prosperous, successful nation in the history of the world,” says Rep. Tom Price, a Georgia Republican. “Transferring liability from borrower or lender to the American taxpayer is not the avenue to continued prosperity for our nation.”

Public support for a housing bailout is far from overwhelming, with 56 percent of Americans favoring government intervention and 42 percent opposing it, according to a recent Gallup Poll. This sentiment has emerged online as well. At, visitors are encouraged to donate money to help establish a “nonprofit entity, fund an office, fund travel to Washington, DC to meet with our representatives so that we can make sure that they understand that we won’t tolerate a bailout.” Through, you can pick up a “Stop The Bailout” golf shirt for $16.99.

Republican opposition

Political opposition to the bailout is coming from the GOP. More than half of Republicans—58 percent—oppose a housing bailout, according to Gallup. In a March 7 letter to President Bush and Treasury Secretary Henry Paulson, 18 Republican congressmen, including Price, voiced their disdain for a housing rescue. “We should resist the impulse to implement economic methods to artificially inflate housing prices and expose taxpayers to billions of dollars of financial risk,” the lawmakers wrote.

The upheaval in the nation’s housing markets is certainly chilling. After a steep run-up in the first half of the decade, sharply falling house prices have put roughly 8.8 million Americans underwater—meaning they owe more on their mortgages than their homes are worth—in the first quarter of 2008, according to Moody’s Continued turmoil could lead to 1.25 million home foreclosures this year, estimates.

Bailout supporters argue that the government needs to step in to prevent additional foreclosures from sandbagging home prices further. To that end, Rep. Barney Frank of Massachusetts and Sen. Christopher Dodd of Connecticut—both Democrats and the top lawmakers on their respective financial services committees—have introduced plans that would allow struggling borrowers to refinance into more affordable loans guaranteed by the Federal Housing Administration. The plans would require taxpayers to pick up the tab on upfront costs of between $10 billion and $20 billion.

“Moral hazard”

Critics of the plans argue that they would create a “moral hazard,” by shielding borrowers from the consequences of their risk. “It just sort of adds fuel to the fire,” says Rep. Ron Paul, a Texas Republican. “The assumption always is if [lenders and investors] get in trouble, they will be bailed out—and sure enough, that’s what all these plans are.” Wayne Brough, the chief economist at FreedomWorks, a fiscal conservative advocacy group, says that the bailout would penalize borrowers who did not obtain risky, exotic mortgages, by handing their tax dollars over to those who did.

In addition, those who do not own homes will also be unfairly punished, Brough says. “Renters—who are really not in this at all—are sort of being asked to contribute to a crisis that was not of their own making and they had no involvement in,” he says.

But in an election year, asking the government to stand by as hundreds of thousands of American voters lose their homes is a tough sell. Even bailout opponents admit they face an uphill battle. “With this Congress, with this leadership, with this speaker, with this chairman, big-government solutions are the only answer that they know,” says Price, the Georgia congressman. “So it’s very likely that the House will pass a big-government solution. Whether or not it will be something that the Senate will be able to pass or that the president and the administration will be able to support is the question.”