US Homeowner Bail-Out Hits Resistance

The agreement in the US Senate on Thursday to create new bipartisan housing legislation reflects intensifying pressure in Congress to tackle the mortgage crisis.
Despite the emerging consensus across party lines in favour of more government intervention in the housing market, the final shape of the bill has been influenced by a curious coalition opposed to a state rescue for mortgage borrowers.

Opposition to government aid to homeowners also has a broad base – pitting renters against homeowners, the young against the old and prudent savers against ambitious housing entrepreneurs.

Voices against aggressive housing legislation are coming particularly from areas that avoided a speculative property bubble. People in such areas feel they are being made to pay for mistakes committed in a relatively small group of boom-and-bust states such as California and Florida.

“The inequities smell to high heaven,” said Paul McCulley, managing director of the investment company Pimco. “The fool is going to be rewarded and I, the taxpayer, will be put at risk at the margin for that handout to the fool – when all I did was exactly what I was supposed to do. Where is the fairness here?”

A poll last week found that 53 per cent of Americans reckoned the government should not help out homeowners who borrowed more than they could afford, with only 29 per cent in disagreement and 17 per cent unsure.

Opposition to government help for banks that made bad loans was even stronger, with naysayers outnumbering proponents four to one, the Rasmussen Reports survey reckoned.

“[Lawmakers] need to look at how widespread the support is for these plans. There is a big percentage of the population who are renters and who don’t have any skin [in] this game,” said Wayne Brough, chief economist at Freedom Works, a conservative pressure group.

Many attribute hostility to any kind of government intervention to the disastrous resolution of the savings and loan crisis. More than 1,000 community mortgage lenders failed during the late 1980s and early 1990s, costing the US taxpayer about $200bn (€126bn, £100bn).

There also appears to be a broad consensus that to cushion borrowers and lenders against the consequences of their actions is to risk spreading “moral hazard” by forming a perverse incentive to repeat past mistakes.

The Democratic leadership in Congress will argue that proposals on the table now – including at least $300bn in federal guarantees for re-financing mortgages at lower prices and public funds for advice on foreclosures and for states to buy abandoned homes – represent the difference between some government action and none.

The hope is that the bill could set a floor for house prices and help limit the crisis. Advocates say taxpayer money at risk is small, set against what the Federal Reserve, backed by the Treasury, could lose by last month’s Bear Stearns rescue.

But Patrick Killelea, 42, a computer programmer and part-time blogger in Silicon Valley, is unconvinced.
He has never voted Republican but said he might vote for John McCain, the Arizona Republican, in the November presidential election purely because of his cautious opposition to the bail-out issue.

Instead of buying a home, Mr Killelea chose to rent for the past seven years. He is angry that speculators may now get government assistance.

“I’m particularly annoyed that they are changing the rules of the game to favour one group [struggling homeowners] just when it looked as if things were getting better for people who were saving and doing the right thing,” he said.