Subprime bailout? $120 billion

More than 1 million borrowers may be at risk of defaulting on their mortgages. Assisting them all wouldn't come cheap.

By Stephen Gandel, Money Magazine senior writer

NEW YORK (Money) -- Want to pick up the check for every homeowner who got saddled with a risky mortgage? It's a big one - on the order of $120 billion.

Lawmakers and consumer groups in recent weeks have been calling for assistance for those at risk of defaulting on their mortgage.

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Should subprime borrowers be bailed out?
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On Wednesday, Congressional Democrats led by Charles Schumer (D-N.Y.) advocated steering hundreds of millions of dollars into nonprofits to help the growing number of homeowners who are having trouble paying their mortgage.

But economists and industry experts say the cost of a bailout would be significantly more than that.

Christopher Cagan, director of research at First American CoreLogic, says rising mortgage payments on adjustable rate loans will force 1.1 million homeowners into foreclosure over the next 6 years. He estimates the cost of paying off the debt for those borrowers would be $120 billion.

A spokesperson for Sen. Schumer says the senator is not suggesting the government should pay off borrowers' loans in full. The spokesperson says Schumer believes a mixture of counseling and restructuring of the loans would bring down the costs of the program considerably. He says Schumer hasn't finalized a plan, and that Schumer has said banks and lenders should foot part of the bill.

But even a partial bailout plan would cost far more than a few hundred million dollars.

Larry Litton, whose company Litton Loan Servicing oversees the payments on 400,000 subprime loans, says on average it costs his company $16,000 to put one of its customers through a "loan modification" program if which borrowers get moved into loans with slightly lower rates. That would put the price tag of a nationwide program to assist troubled borrowers at $17.6 billion, using Cagan's default estimates.

"The numbers are going to get very large," says Raphael Bostic, a professor of economics at the University of Southern California. "I don't think this is a feasible plan."

A historic rise in delinquency rates among borrowers with low credit ratings has raised concerns that a record number of Americans in the next few years will be unable to pay their mortgage. Many of those borrowers were put into loans with low teaser rates that are now adjusting upward, sometimes doubling their monthly mortgage payment.

Consumer advocate groups say those loans, with steeply rising payments, were pushed on borrowers who didn't understand the terms. Advocates say a government bailout, even a large one, is appropriate because regulators didn't do enough to stop predatory lending, and because of the high cost of foreclosures.

"The cost of not doing anything would be devastating to many communities around the country," says Lisa Rise, a vice president at the nonprofit National Fair Housing Alliance.

Rise notes that even a $120 billion bailout would not be without precedent. Economists estimate the federal government spent upwards of $150 billion to resolve the Savings and Loan Crisis of the late 1980s and 1990s.

Still economists say bailout could have the effect of causing more defaults. "If the plan is to pay off loans when people quit, then I plan to quit paying my loan," says Michael Englund, chief economist at Action Economics.

What's more, some economists say a bailout could encourage more risky lending in the future. "A bailout would validate what some of these lenders and borrowers did, which we now understand was reckless," says Carl Tannenbaum, president of the National Association of for Business Economics.

"I don't think that's what we want to do."

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.