Federal Bailout of Bad Credit Home Loans a Bad Idea, HUD Secretary States

Bad credit home loan holders being rescued by the government? Let’s find a different way to help, says an industry insider.

A federal bailout is the wrong way to deal with a wave of foreclosures in the subprime mortgage market, the secretary of the Department of Housing and Urban Development said on Monday.

“While I am sympathetic to the people who are in these tricky situations, I strongly disagree with the idea that a bailout is the answer,” said Alphonso Jackson (pictured), top administrator for U.S. national housing policy.

An increased number of subprime loans offered to borrowers with damaged credit have faced foreclosure in recent months as the housing market has cooled and the early, low payments of those loans have given way to higher mortgage rates.

Earlier this month, New York Sen. Charles Schumer, chairman of the Senate subcommittee on housing, introduced a bill that would give $300 million to community groups that reach out to subprime borrowers facing foreclosure. The Democrat has said he envisions some of the money going to help borrowers pay off troubled home loans and arrange more manageable financing.

However, Jackson said that he opposes such an approach.

“In my mind, companies should not be rewarded for risky investments. The American taxpayer should not foot the bill for risky ventures,” he said in opening remarks at a HUD-sponsored meeting on how to help troubled borrowers.

Jackson also said the subprime market has been a valuable form of home mortgage financing despite the current woes and that he welcomed subprime lenders, “provided they are legal, fiscally responsible and ethical.”

Roughly 80 percent of subprime borrowers who took a loan in 2005 and 2006 will either be able to keep their homes or sell them for more than they paid, Jackson said.

“Most subprime loans remain viable and will not result in foreclosure,” he said, though Jackson added that there is room for the government to help in the current crisis.

Specifically, he endorsed reform of the Federal Housing Administration - a Depression-era program that insures low-income home buyers thrugh a helpful FHA loan program.

The FHA is set to help 60,000 subprime borrowers refinance home loans this year, Brian Montgomery, chief of the Federal Housing Administration, has told lawmakers, and quick passage of reform could mean helping 200,000 more.