A homeowner bailout becoming a possibility

One only needs to read comments on various blogs to realize how angry people will become -- especially renters waiting for home prices to fall so they can buy something -- if there's a government bailout of homeowners underwater on their homes or otherwise headed for default.

And yet that very idea is slowly trending towards a possibility -- not yet a reality, but something that's being considered because private-market solutions simply aren't working. To be sure, both sides have their compelling arguments, but when the U.S. economy is at stake -- in a Presidential election year, no less -- many would argue that politics will almost certainly win out over what many perceive as basic fairness:

Prodded in part by some of the nation’s biggest banks, the Bush administration and Congress are considering costly new proposals for the government to rescue hundreds of thousands of homeowners whose mortgages are higher than the value of their houses...

Administration officials say they still oppose any taxpayer bailout for either people who borrowed more than they could afford or banks that made foolish loans during the height of the speculative bubble in housing.

But with the current efforts to arrest the housing collapse so far bearing little fruit, Washington is being forced to explore new ideas, among them the idea of a federal mortgage guarantee for troubled borrowers.

And policy makers are listening to proposals from industry and community groups to use government funds to purchase and refinance billions of dollars in mortgages now in danger of default...

The housing slumps of the mid-1970s and late 1980s were confined to the coasts. The current bust, while leaving some cities relatively unscathed, has cut a far wider path and it comes just when home debt is at its highest level since World War II...

Some eventually default, surrendering to foreclosure. But the vast majority — embedded in their communities, their children in public schools, their reputations at stake — wait nervously in hope that prices will bottom and rise once again, eliminating their negative equity and restoring their freedom to sell or refinance...

In Washington, it will be difficult to engineer a bailout similar to the one for savings and loan companies in the early 1990s, because Democrats and Republicans alike cringe at the very word bailout and fear a backlash by people who never became overextended.

But with millions of homeowners already underwater and the prospect that millions more may face the same situation, Democrats and Republicans alike are scrambling for ideas to keep people from simply walking away from their homes and to help those struggling to pay their bills.

But here's why it's catching the attention of politicians:

For Americans caught in a mortgage trap and owing more on a home than it would sell for, consumer spending and confidence are the most immediate casualties, Mr. Curtin reports. But the damage goes deeper.

People cannot move easily to jobs in other cities if they have to sell their homes at a loss. The $168 billion federal stimulus package is likely to be less effective than intended because many homeowners may simply use their government checks to pay down their debts.

Actually, that argument was widely floated before the stimulus plan was signed but both parties felt pressure to do something. With the economy still in danger of tanking, look for the pressure to do more to only increase.