Saturday, December 1, 2007

The Bush Administration Halting Interest Rates

In a glorious move to devalue the dollar even more, the Bush administration is calling for a temporary freeze on interest rates:

WASHINGTON -- The Bush administration and major financial institutions are close to agreeing on a plan that would temporarily freeze interest rates on certain troubled subprime home loans, according to people familiar with the negotiations.

An accord could reassure investors and strapped homeowners, both of whom are anxious as interest rates on more than two million adjustable mortgages are scheduled to jump over the next two years. It could also give a boost to the Bush administration, which is facing criticism for inaction amid the recent housing turmoil.
It may reassure Wall Street, but foriegn investors are going to dump our currencies and start investing in the Euro if the dollar keeps devaluating. Even if Wall St. surges, every dollar they gain and have gained will be worth less. The dollar is going to hell, and we are going to see inflation. I don't think we have fully realized the inflation yet, but when we do, this is surely not going to help. So why then would they do this?

Many subprime loans carry a low "teaser" interest rate for the first two or three years, then reset to a higher rate for the remainder of the term, which is typically 30 years in total. In a typical case, the rate would rise to around 9.5% to 11% from 7% or 8%. That would boost an average borrower's payment by several hundred dollars a month.

Exactly which borrowers will qualify for the freeze and how long the freeze would last are yet to be determined. Under one scenario, the freeze could run as long as seven years. The parties are developing standard criteria that would determine eligibility. The criteria should be finalized by the end of year.

[...]

The creditors are likely to look at whether the borrowers have equity in their homes, despite falling house prices, and whether their incomes are holding steady.
In effect, it's a bailout. A conservative one at that, but it still will have negative consequences. Why should a certain group of people get special privileges just because they can't pay? Is that not their own fault, and the fault of the mortgage group? Why should we give them what in effect is corporate and individual welfare?

As a drumbeat of bad news about housing has continued -- including news of fewer home sales, falling prices and higher foreclosures -- the Bush administration has come under pressure to be seen as actively addressing the problem.

[...]

Interest rates are set to reset next year on $362 billion worth of adjustable-rate subprime mortgages, according to Banc of America Securities. An additional $85 billion in such mortgages is resetting during the current quarter. The estimates include loans packaged into securities and held in bank portfolios.

Borrowers whose loans are resetting are likely to have a tougher time sidestepping the rising payments by refinancing or selling their homes. Lending standards have tightened and many borrowers can't qualify for refinancing. And falling home prices mean that many borrowers have little or no equity in their homes. Some owe more than their homes are worth.

So? Shouldn't you have to take responsibility for your actions? The market will inevitably come to a "correction" and it won't be nice. The more we try to bail out and put it off, the worse it will be.

Top Treasury officials fear that unless creditors agree to relax the terms on many of those mortgages, borrowers will default at a higher pace. About 6.6% of subprime mortgages were in foreclosure as of August, the most recent data available, according to First American LoanPerformance.

I think Mish has it right:
But let's get one thing straight right up front. This has nothing whatsoever to do with "saving people's homes". This is about saving financial institutions from collapse. And the plan will fail. It rewards those who cannot afford to pay. The details are not in yet but I suspect one measure of the ability to pay will be whether or not one is current on their loans.
[...]

How those collective minds think this plan will work is beyond me. Here are three simple reasons the plan will fail:
  • This plan will encourage those on the edge to fall behind just to get a freeze.
  • This plan will foster resentment from those not being bailed out.
  • This plan is a transparent attempt to make people debt slaves forever.
Ditto.

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