First Bear Stearns got a cash infusion from the Federal government -- now over-leveraged homeowners may be the next beneficiaries. The House and the Senate are considering proposals for intervening on a massive scale to ward off foreclosures to sub-prime borrowers. In order for borrowers to benefit from this proposed program, lenders must reduce the principal of a loan to 85% of the home's current market value. The FHA would take a fee of 5% of the home's value. Homeowners would get the remaining 10% as equity in the property, providing them some stake in the home so that they are incentivized to pay off the mortgage.
Debate will inevitably rage about whether some homeowners will take advantage of this program who do not need the government support. Some may argue that homeowners who took out these sub-prime loans should never have been given loans or that their lack of fiscal discipline has gotten them into this quandary in the first place. Regardless, the Federal government realizes that this aid package -- at the expense of the American taxpayers -- is preferable to massive foreclosures, plunging real estate prices and displacement of a large swath of the American populace.
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