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Economists Oppose US Government Bailout of Problem Homeowners


A group of mostly academic economists who formed what they call the Shadow Financial Regulatory Committee Monday offered its own proposal to assist low-income home buyers threatened with repossession. VOA's Barry Wood reports the group is opposed to the government idea of giving financial help to homeowners in distress.

Committee member Kenneth Scott of Stanford University said it would be a mistake for the government to provide financial aid to home buyers threatened with losing their homes. He said that action would be expensive and encourage others to demand similar treatment. A better solution, said Scott, is for the lender to take back the home and rent it back to the occupant with an option to repurchase at a lower price.

"This arrangement would not create incentives that would distort mortgage financing and induce even greater risk taking by borrowers in the future," said Kenneth Scott. "And that is an important point to keep in mind when you're talking about any kind of federal subsidy."

Scott's proposal addresses the problem of some 600,000 low-income, sub-prime borrowers who purchased homes with little or no down payments. Interest payments that were waived for an initial period are now being imposed, creating a burden that many purchasers cannot handle. Another committee member, Robert Eisenbeis, blames the Federal Reserve, the U.S. central bank, for keeping short-term interest rates artificially low in 2003 and 2004.

"I think it is fairly clear that when that happened that was a major engine that drove a lot of the ups and downs, and particularly the ups, that we saw in the housing market," said Robert Eisenbeis.

The overnight bank lending rate, the fed funds rate, went to a 40-year low of one percent in 2003 and 2004. Home prices in the United States rose swiftly as interest rates on mortgages fell beginning in 2001. In 2007 home prices declined and they continue to fall in many parts of the country. Much of the current turmoil in financial markets would have been avoided, says Eisenbeis, if the central bank had pursued a steadier monetary policy.

"From a monetary policy perspective, the focus should be on the intermediate and longer term, and targeting rates that are consistent with equilibrium," he said.

Both the Federal Reserve and the U.S. Congress are facing political pressure to help problem home buyers. An estimated two million American families are threatened with foreclosure - the loss of their homes - in 2008.

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