Based on this article, which seems to suggest that all (or most) mortgage rate increases for variable-rate mortgages would be frozen for some period up to 5 or 7 years. The ostensible purpose seems to be to prevent thousands of families from losing their homes. The real purpose may be different, I’m not sure.
I have mixed opinions about this. I understand how having all these families defaulting would cause real economic problems for the country as a whole. But to me it seems vastly unfair to those (among whom I count myself) who did it the hard way. I had a variable line of equity credit that I needed just to buy the house, and it was killing me, so I scrimped and did a lot of sweat equity so that the value of the house was sufficiently increased that I could refinance and fold that LOC into my first mortgage. It just seems like these other home buyers are getting kind of a free ride. (I know, sounds like sour grapes, and I’m not married to that point of view.)
And I have heard all the stories about “predatory lending” which all sound to me like wannabe homeowners feeling entitled to buy a house without wanting to think about the realities of what was almost certain to happen a few months down the road.
So I would like to read what you all think about the fairness or otherwise of such a move, and whether the benefits to the economy outweigh any considerations of fairness.
Your cite doesn’t say that at all - only rates for at-risk borrowers - those at risk of foreclosure - would be frozen. 5-7 years is on the high end, no doubt the final number would be in the middle.
Seems reasonable to me. Foreclosures are expensive for everyone, borrower and lender, unless the lender starts charging all kinds of fees, of course. They pull down the market value of houses in the area whose owners aren’t at risk, like you and me, for instance.
I know it is popular to accuse the borrower of greed, but I’ve read plenty of cases showing there was lots of hanky-panky by lenders. The Mercury News reported one agency who refused to give Spanish language paperwork to Spanish language buyers, and put them into loans there was no way for them to afford. Some mortgage companies encouraged agents to sell variable rate mortgages to people who could qualify for better fixed rate ones. Then there were loans made without adequate documentation. The borrowers weren’t walking into mortgage brokers demanding loans at gunpoint after all. For the most part those at risk are those who didn’t really appreciate what they were getting into, not economics professors.
So, go ahead and make the borrowers suffer - but you might find that your sweat equity has vanished in a market downturn. Is that really going to make you feel better?
Lot’s of things make me feel good, like fried chicken, or Natalie Portman, but one would hope that the decision makers in this case are motivated more by sound economics than emotion.
So what, in your opinion, would be the economic case for government intervention to prop up a speculative asset bubble? Bearing in mind that this is exactly the kind of government intervention that brought you here in the first place.
Your last point is better than your first. The article makes it clear that they are still struggling with determining whose rates would get frozen and whose would not.
The part that irks me the most is the idea that below-market teaser rates would be frozen. This makes me think of those mortgage offers I (used to) get in the mail all the time, encouraging me to move my mortgage to some outfit that would give me a temporary rate several points below market rates, which would later become adjustable. Then the government steps in and forces the lender to change to terms to my advantage, giving me several more years at that ridiculously low rate.
Throatwarbler, I didn’t understand your last sentence, I wasn’t even sure if it was directed at **Voyager ** or at me…
Excuse me? Having no lending standards is government intervention? Tell me again which government regulations caused this crisis?
Do you think a nosedive in housing prices as foreclosed homes come on the market, sold by banks who want to get rid of them as quickly as possible is going to help anything? Do you think it is going to help the liquidity crisis? Do you think lenders or bondholders are carrying the income inspected from the reset mortgages of people on the brink of foreclosure on their books, and should they be? I suspect this will help them evaluate the true value of their holdings and help stabilize the markets.
I agree that this has to be based on sound economics, and it punishes neither the lenders nor the borrowers. Forcing borrowers with loans being reset into foreclosure punishes both.
The Hoover Administration stuck to their balanced budget principles - how did that work out? Maybe FDR didn’t cure the Depression, but he certainly made life better for a lot of people.
I see this as a stopgap, but a necessary one. I don’t see how you could adjust everyone to a true market rate. One thing they’re talking about in California is outlawing prepayment penalties that force people to be stuck with the high interest loans even when they can qualify for better ones. I thought this was already illegal in California, actually.
It might hurt the lenders, but not as much as a foreclosure. Anyhow, the benefits of taking responsibility for one’s actions seems to go only for people, not companies. I personally would rather see a company have to lose after they wrote loans that made more sense than buyers who might have been lied to and who had not as much information as the lenders.
I had an ARM back in the mid-80s when high interest rates were heading down, but I got a fixed as soon as I saw the rates stabilize. It’s clear that you more or less did the same thing.
if I lend money to the janitor at a McDonalds that is about to close, and he can’t pay me back after he gets fired, who’s the idiot - him or me? Making high risk loans means you lose sometimes - the mortgage companies should suck it up already. However, as much as I’d like to see more idiot CEOs fired, a change to the rules to stabilize things will be much better.
If you own a house on a block of ten, and three are getting foreclosed and are either going to sit empty for a long time (reducing the tax base and fostering crime) and reducing the value of your house, you might not think that the government has no stake in the problem. This is a clear example of free market forces causing a problem.
If at this point, you are still unaware of the massive liquidity GLUT that the Federal reserve has unleashed since 1999, then I’m afraid we are just talking past each other.
Is this a trick question? Of course it will. That’s how markets work and that’s what the market needs - a correction. Sorry if that hurts your feelings for some reason.
See above.
Again, see above, and I would ask: Unless you happen to own stock in major mortgage lenders, why would any of this concern you? FWIW, I DO own stock in companies with major sub-prime mortgage holdings, so any kind of government bailout would be great for me personally, but I wouldn’t call that sound economic policy.
How about we just let the market sort it out, comrade?
Yeah, that’s the problem with President Bush, isn’t it? Him and his fucking balanced budgets - why, if only there was a war, or something, then we’ll be saved.
Seriously, I don’t think your comparison is at all appropriate, for reasons that should be obvious. If you think they are, then again, we are just talking past each other.
You’re objecting not to regulations, but to basic economic policy then. As a society we’ve decided to try to mitigate the negative impact of market fluctuations through the control of the money supply, the tax rate, and interest rates. (All inter-related of course.) If you want to go back to the good old days of the 1890s, that’s another discussion entirely. I was thinking your objection was much less fundamental than that.
The Fed stands guilty as charged for having a policy on money supply, that I agree.
Oh, we’re getting a correction no matter what anyone does. The question is whether it is going to be a soft, controlled one, or a hard one. It doesn’t hurt my feelings at all. If prices ever get to a point where I am anywhere close to having no equity, or negative equity, in my house, mortgage rates will be the least of our problems. I do have a problem with people who were lied to by their mortgage brokers, and taken advantage of, losing their homes for the benefit of conservative free market fundamentalism.
The liquidity crisis has gone far beyond the mortgage market. If a startup needs to borrow to grow, and can’t, what will that do for job creation?
I have no problem with those who own stock in lenders taking a hit - though the fact that bonds with a big subprime component were rated AAA is an issue. If you bought high risk, high yield products and lost, them are the breaks. If you bought AAA bonds and discovered they were actually junk, you might have a beef with someone.
Now, I suppose the official conservative response to this is that you should have gone out and evaluated those bonds yourself, in other words being smarter than Standard & Poors, just like the subprime borrowers should have doubted the reassurances of the lenders. Nice in theory, doesn’t work in practice.
How much pain are you willing to impose on the innocents for the market? Are the many cases of fraud in the subprime arena instances of the market for you?
Let me remind you how we came to this mess. Since lenders could sell the paper, some could sell high interest loans to those who had no business getting them, and they could hide the risk. I’m not aware that the lack of qualification was reported for these bonds. They make out like bandits, except for those stupid enough to be holding crap paper when the music stopped, and people not involved at all get screwed. Yep, market at work.
It’s an example of the markets at work and what happens with lack of intervention. This is one problem that isn’t Bush’s fault. The budget deficit will bite us, but not in the housing posterior. I wasn’t even opposed to cutting taxes - just to who got the breaks. Do you deny that running a deficit does kickstart the economy? Even Reagan said that we’re all Keynsians now, after all.
I’m wondering how fixing the rates on at-risk adjustable mortgages is going to affect other loans. If lenders find their money tied up in loans that aren’t getting the rates that they were expecting, will they raise rates on new 30yr conventional loans, to make up the difference?
If they fix the rates only for those at risk, that represents loans that would never pay off at the higher rates anyway, and which would probably get written off. Now, the companies will have to report less than expected earnings, but that is happening anyway, and just shows they didn’t understand the market.
Similar scenarios are playing out with state-run funds in Montana, Maine, and lately Connecticut. The free-market zealots, of course, will point to all this as a natural correction, nothing to see here, no need for government oversight…
There’s also the fact that a lot of these holdings are categorized as “Level 3” assets, a term which means they are “so illiquid, or trade so infrequently, that they have no reliable price, so their valuations are based on management’s best guess.”
These, to me, are the elements of a great con game: Investments where sellers tell you how much they’re worth, hide “gotchas” like a liquidity put in the fine print, then prevent you from getting your money back when you discover you’ve been had. This is how a “free” market is supposed to work?