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Economists Oppose US Government Bailout Of Problem Homeowners

Publication Date: 
May 05, 2008
Voice of America
Barry Wood

Professor Kenneth Scott appeared in a Voice of America story about a group of mostly academic economists who formed what they call the Shadow Financial Regulatory Committee. 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.