How much will it cost taxpayers when Treasury renegotiates troubled loans it buys from banks?
If your neighbors couldn't afford their mortgage, would you help them? You likely will, with tax dollars, in the expected federal takeover of troubled home loans. Once the US Treasury buys up such loans from Wall Street, millions of distressed homeowners on Main Street may be offered a break – a bigger one than they might otherwise get from private lenders.
America's financial crisis is throwing Uncle Sam into playing the role of a local banker forced to renegotiate mortgages in trouble, deciding if borrowers can afford homes they already occupy in markets where prices are uncertain.
One question before Congress as it debates a bailout is this: How forbearing should Treasury be toward borrowers who can't afford their mortgages?
Some lawmakers want the government to go easy in renegotiating loan terms. The idea is to stabilize neighborhoods suffering from high foreclosure rates and vacant houses, as well as to put a floor under sinking prices. (Banks now own 16 percent of the inventory of existing homes nationwide.) And in many cases, it would be less expensive to grant better loan terms to creditworthy borrowers than to spend some $50,000 for each foreclosure.
But such mortgage leniency, an otherwise compassionate idea for struggling homeowners, comes with a high price tag.
First, taxpayers may take a hit once these mortgages are renegotiated and then resold by the Treasury. These sales are supposed to recoup the cost of this bailout, which may be up to $1 trillion. But home loans that are reworked to lower the principal owed or that can be paid back over a longer time are worth less to investors.