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CNBC's Olick: Calls for Subprime Bailout Growing on Capitol Hill

Community advocates and some top Democrats are calling for the government to bail out struggling subprime borrowers, CNBC’s Diana Olick reported.

A new report from Congress' Joint Economic Committee finds every foreclosure in America costs combined stakeholders -- homeowners, loan servicers, lenders, and local governments -- up to $80,000. With 1.8 million adjustable rate mortgages scheduled to reset this year, the foreclosure rate will only rise, Olick said.

“It makes good economic sense to make sure families and neighborhoods are protected from rogue lenders and lax government oversight,” New York Senator Charles Schumer said in a speech on Capitol Hill, calling for hundreds of millions of dollars of federal aid to help homeowners. “It'll save homeowners from losing their equity, save cities and local governments from losing their tax revenues, and save neighborhoods from taking a big hit.”

Meanwhile, New York Senator Hillary Clinton is seeking a modernization of the Federal Housing Administration, while Senate banking committee chairman Christopher Dodd wants legislation that would include a grace period for borrowers in default.

But critics say implementing those measures may only worsen the problem.

“You induce people to say, 'Well, it's a better deal to default on my mortgage, because then I qualify for help.' And you get all these kind of incentive problems that such programs generally have,” said Alex Pollock, a resident fellow at the American Enterprise Institute and former CEO of the Federal Home Loan Bank of Chicago.

Critics note that lenders want to avoid foreclosure and are already aggressively mobilizing to refinance borrowers in default. Citibank and Bank of America, for instance, are working with a Boston-based mortgage group to do just that, Olick said.

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