You may not know it yet, but you're about to join Ben S. Bernanke and Henry M. Paulson Jr. in the effort to clean up toxic mortgages.
They'll get the glory. You'll pick up the tab.
How taxpayers will pay for dumb borrowing decisions and even dumber lending decisions is far from clear. But don't believe the Bear Stearns bailout is the only thing financial regulators have been cooking up. The mortgage crisis is too big for the remedies offered so far. You're the only thing left - or at least the only thing Washington can push around.
Few will admit this, of course.
"I don't think I've seen any scenario where the American taxpayer needs to be stepping in with more taxpayer dollars," Treasury Secretary Paulson recently told The Wall Street Journal.
How about this scenario? There are 2 million unsold homes on the market, the biggest inventory since the early 1980s. The number is rising with foreclosures. One in 20 mortgages is delinquent. Falling home prices and depreciating mortgage bonds have already ruined uncounted homeowners and lenders. Bear Stearns is only the latest. And we aren't even officially in a recession. Wait till rising unemployment causes a new wave of foreclosures.
Taxpayer-free remedies aren't working.
Lenders have modified too few mortgages under the White House's voluntary "Hope Now" program. Federal Reserve chief Bernanke has asked financiers to chop some of the principal owed on troubled mortgages, but that too is voluntary. A Democratic proposal to let bankruptcy judges force new mortgage terms is going nowhere.
Taxpayers are already getting pulled toward the whirlpool. The Federal Housing Administration, Fannie Mae and Freddie Mac - all explicitly or implicitly backstopped by taxpayers - have begun covering riskier borrowers.
The Federal Reserve's increasing willingness to hold mortgage bonds is another piece of the government camel inside the mortgage tent, although there is no direct taxpayer exposure.
And it is probably only a matter of time before banks and thrifts backed by taxpayers start going under. "There will probably be some bank failures," Bernanke told Congress three weeks ago.
Banks pay premiums to the Federal Deposit Insurance Corp. in return for its promise to cover depositors up to a limit. But taxpayers step in when claims exceed reserves, as happened after the savings and loan debacle of the late 1980s. The FDIC is reportedly hiring extra examiners, although it says it doesn't expect a surge in bank failures.
Speaking of the 1980s, the government-chartered company that sorted through savings and loan sewage is a good model for what will probably happen with mortgages. But the job is more complicated this time.
The bailout vehicle called the Resolution Trust Corp. peddled assets of failed thrifts to private investors. Its main debtors were busted real estate developers. It dealt only in assets formerly held by federally insured depository institutions.
The whole thing cost taxpayers about $150 billion.
Like the RTC, the government's Subprime Suckers "R" Us Corp. will try to quarantine radioactive mortgages and real estate and resell them when conditions improve. (Memo to bottom-fishers: The best distressed real estate prices won't come until the seller is the government.)
But Washington's business partners will be hedge funds and investment banks. Its main debtors will be struggling homeowners, which will prompt pressure from Congress for loan modification and forgiveness.
So this time taxpayers won't be helping mom-and-pop thrift depositors. They'll be rescuing incompetent borrowers and stupid lenders whom Paulson and President Bush promised not to help.
Unorthodox. Questionable. But it's an election year. And without a firewall between bad mortgages and the rest of the economy, policymakers worry the damage will spread. Troubles in residential real estate will extend to commercial property, prompting more bankruptcies, lower consumer spending and higher unemployment. And more mortgage pain.
"The financial system can't settle down until the downdraft in housing prices comes to an end," says Mark Zandi, chief economist at Moody's Economy.com. He suggests banking companies compete to sell mortgages to the Treasury, which would hold the notes and modify terms for struggling homeowners. "You could put up a $150 billion fund," he says, "and you'd solve the problem."
There will be pressure for the Fed itself to buy mortgages, but the central bank will vigorously resist such a risk to its balance sheet.
No, it looks like taxpayers are about to become involuntary partners in a giant junk-mortgage-bond hedge fund. They'll buy high, sell low and hope an economic turnaround makes it worth the price.
jay.hancock@baltsun.com