The Need For A Government Backed Bailout For Foreclosure Victims
May 13th, 2008
There is an urgent need for a government-backed bailout for foreclosure victims. Delay will spell disaster. There is a hue and cry that why should the taxpayer’s money be used to rescue scheming investors and speculators. On the other hand it cannot be ignored that one out of 33 borrowers who took sub-prime mortgages will be foreclosed upon within the next two years. These are not just figures inked on paper to be read with the morning news but something that can happen next door and infect everybody. Sometimes a situation arises when the right thing is not always fair but still it has to be done for the greater good of the community.
If something is not done – and done fast, then the value of property of 40 million house owners will drop. This will lead to a drop in municipal taxes by $356 billion within the short time of the next two years. These are the findings of Pew Charitable Trust. The situation must not be allowed to linger. With the knocking down of house value and tax rates, community projects will also not take off for lack of funds. Empty houses will court crime and criminals apart from creating health problems.
It is a vicious cycle. Low house prices lead to more foreclosure houses as the units cannot be sold or refinanced. This pushes down prices further. The loan amount becomes higher than the worth of the house. So there is no incentive for the borrower to keep up with the mortgage.
During a speech on Monday the Federal Reserve chairperson Ben Bernanke drew attention to this particular aspect of the problem. He urged the Congress to take positive steps quickly. Last year about 1.5 million houses had been foreclosed upon across the country, he noted. This was an increase of 53% over 2006. The rate of spike is likely to be higher in 2008.
High foreclosure rates tell on the real estate and financial markets and thus affect negatively the general economy. Thus doing something to forestall foreclosures is not about helping only the borrowers and lenders but also the interests of all. Bernanke and his colleagues in the government had spoken upon similar lines when the extraordinary step of rescuing Bear Sterns from bankruptcy was taken. The Feds had come in for sharp criticism by doing so. The reply was that the government took this recourse to stabilize the economy.
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