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A massive taxpayer "bailout" is under way. For as unwieldy and complex as the subprime problem is, the cost to taxpayers could end up being minimal.
In the 1980s, when nearly 4,000 savings and loan institutions became insolvent, it eventually cost taxpayers the equivalent of about $400 billion, in 2007 dollars, to clean up the mess. This time, by contrast, the government hasn't spent any taxpayer money to bail out banks or investment firms. Not yet, anyway.
When the Fed brokered the buyout of Bear Stearns (BSC, news, msgs) by JPMorgan Chase (JPM, news, msgs), it took responsibility for $29 billion of troubled securities, money that will indeed come out of taxpayers' pockets if the whole portfolio turns out to be worthless. But the Fed eventually will sell the securities for something -- and perhaps recoup most or all of the money it has pledged.
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Other government proposals could use taxpayer money to guarantee or refinance certain mortgages, which, again, might put taxpayer money at risk -- but fall far short of a giveaway.
There are still plenty of losers, mostly investors who bought mortgage-backed securities or stock in firms that traded heavily in such securities. Some of those investors are distant institutional entities, like sovereign wealth funds or the Bank of China. But the losses also touch millions of Americans through mutual funds, pension funds and individual stock holdings in companies like Citigroup (C, news, msgs), Merrill Lynch (MER, news, msgs) and of course Bear Stearns.
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It's obvious now that some home buyers over the past few years took out loans far beyond what they could afford, with foreclosure probably inevitable even if house prices had continued to rise. But even people who consider themselves financially literate aren't so shrewd. A 2007 study by the Federal Trade Commission, for instance, instance, found that:
- 20% of borrowers looking at mortgage disclosure forms couldn't identify the interest rate amount.
- 24% couldn't tell which loan was less expensive, when looking at two different applications.
- 30% couldn't tell if the loan included an expanded "balloon payment" at some point.
- 44% couldn't tell if there was a prepayment penalty for refinancing within two years.
Subprime borrowers aren't the only dupes. Prime borrowers fared only slightly better on most of the questions.
One likely reform to emerge from the subprime mess is a set of simplified mortgage forms that spell out costs and terms more clearly. By then, maybe consumers will have become a bit more wary of deals that seem too good to be true.
Nah.
| The housing bust: A statistical portrait | ||
|---|---|---|
Percentage of mortgages bundled into securities | 55.8% in 1994 | 74.2% in 2007 |
Percentage of subprime mortgage packaged into securities | 31.6% in 1994 | 92.8% in 2007 |
Percentage of mortgage originations that were subprime | 4.5% in 1994 | 20.1% in 2006 |
Share of mortgage originations by federally regulated savings institutions | 29.8% in 1987 | 8% in 2006 |
Share of mortgage originations by less-regulated mortgage brokers | 20% in 1987 | 58% in 2006 |
Average annual rise in home-price value | 3% 1990-1999 | 8.6% 2000-2006 |
U.S. home-ownership rate | 63.5% in 1985 | 68.2% in 2007 |
Ratio of median home price to median household income | 3.2 in 1985 | 4.6% in 2006 |
Household debt as a percentage of disposable income | 74.9% in 1985 | 137% in 2007 |
Foreclosure rate on mortgages issued between January 1999 and July 2007 | 2% on prime loans | 13.7% on subprime loans |
Total cost of savings-and-loan crisis of 1980s, in 2007 dollars | $408 billion | |
Total estimated cost of subprime crisis, so far | $150 billion to $500 billion |
Sources: Milken Institute, Census Bureau, Federal Reserve, Federal Trade Commission, Office of Federal Housing Enterprise Oversight.
This article was reported and written by Rick Newman for U.S. News & World Report.
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