This makes my blood boil: Bush to outline 5-year rate freeze plan
“…sources, who are familiar with details of the trade group’s pitch, said the plan envisions covering subprime loans taken out between January 1, 2005, through the end of this past July, with rates that are due to reset over the coming 2-1/2 years. An estimated 1.8 million U.S. homeowners who took out loans with low teaser rates face pricey loan resets next year alone, the Federal Reserve has said.”
A commenter on the story had this to say, and pretty much nailed my thoughts:
dear mr. president – i have been advised of a rent increase in my rental apartment – i can’t afford to pay the increase (and maintain my overextended lifestyle) but i wopuld like to stay anyway – do you think you could add a rider to your little mortgage rescue plan that saves my aprtment for me – thanks – oh and after that could you put a freeze on my cellphone bill – thats too high also.
I highly recommend reading Rich Toscano’s article at Voice of San Diego: The United States of Bailouts
The big news of late, however, is that Treasury Secretary Hank Paulson is putting together a plan in which some borrowers who took out adjustable-rate loans will have their rates frozen at the initial “teaser rate” so that they can continue to stay in the homes that, strictly speaking, they could never actually afford in the first place.
Will Paulson’s plan work? It might keep some people in their homes, but it doesn’t address the real long-term issue, which is that homes are still far too expensive in comparison to incomes. It also doesn’t address the real short-term issue, which is that there is a huge oversupply of houses for sale. For as long as homes are both unaffordable and in abundant supply, extending a teaser rate for five years won’t really have a big effect one way or the other. There is also a question of how many potentially defaulting borrowers will want to stay in their homes even if they can keep their teaser rates. They are still on the hook to pay the loan off eventually, after all — given that so many of them owe more than their homes are worth, it stands to reason that many borrowers will bail out of their loans whether they can scrape up the monthly payments or not.
…These policies punish the prudent, reward the reckless, and will in all likelihood cause more long-term problems than they solve. Similar efforts to fight off the effects of the stock market crash earlier in the decade were themselves a huge contributor to the housing bubble and, in turn, to the issues we now face. Policymakers have clearly not learned a single thing, and the most important thing they have not learned is that the systemic risk posed by a bubble can only be truly mitigated (rather than redirected somewhere else) before the bubble gets out of control, not after it has already burst.
Besides, most of these policies amount to an attempt to keep homes unaffordable. How exactly is that a good thing?