Subprime mortgage rate freeze for 5 years...who benefits and who will pay for it?

[jkarolyi]

Just read here:

http://news.yahoo.com/s/ap/20071205/ap_on_go_ca_st_pe/mortgage_crisis

that president Bush has hammered out a plan to freeze mortgage rates on sub-prime mortgages for five years to stave off foreclosures. Why is the government interfering in this free market exchange?

People took out risky loans on homes they couldn't afford. Some banks and home lending firms wrote and approved extremely risky loans that they knew would be foreclosed on.

I say let the market let things sift out. The home lending firms that made these nutty loans will go bankrupt, and people who bought more house than they could afford will go back to renting as they should! Government intervention just encourages the behavior of risky loans and extravagant borrowing to continue. "The government will always come to our rescue!"

The mainstream press doesn't go into who will pay for the mistakes of the financially inept home buyers and knumbskull home loan companies. For those who know more about business and finance, who will pay for these five years of 2% fixed rate loans that banks can't make money on?

[Zeke]

I agree with you, Jay, and what's more, the damage is done. Why close the barn door after the horse is gone?

[Porsche-O-Phile]

That's patently un-American. Shame on you. Everyone knows that the fiscally responsible must be punished in order to reward the stupid and reckless. How else do you expect society to encompass everyone and be open to the lowest common denominator? Equality, you know comrade?

Silly boy.

[Hugh R]

That's nice, so a person who bought a house for say $500,000 and got a teaser rate of 1.8% gets to keep it so that he doesn't have to pay say 5% like everyone else. What a dumbass I was getting a fixed 15 year loan at 4.5% about 6 years ago when I refi'd from a 30 year loan.

[tabs]

Does one think that there is enough money in FDIC to cover those BK Bank deposits?

The problem is the pricing of the commercial paper that encompases those sub-prime loans. No one knows which are good loans or bad loans they are all mixed up together in the commercial paper in the financial sectors portfolios. By saying that these loans will be good for 5 years provides a floor for value and they can again be traded with confidence. Otherwise no one knows the value and attending risk involved so they in a sense become untradable.

[jorian]

This will exacerbate the liquidity issue that created the so-called "credit crunch" in the first place. No one will want to buy these loans.

[tabs]

Originally Posted by jorian

This will exacerbate the liquidity issue that created the so-called "credit crunch" in the first place. No one will want to buy these loans.

NO BODY HAS BEEN BUYING THIS PAPER. Nobody knows which percentage of bad loans is contained in any given piece of paper.

[PatrickB]

+1 on letting the market sift things out!
Why the bailout for morons who lied about their income to get into homes they could barely qualify for at the teaser rate???
A freeze on the subprime rate will only prolong the inevitable stock market crash that will likely happen in the next 6-12 months where a 20-30% correction will be seen... The longer the wait for the correction, the worse it will be!

[Porsche-O-Phile]

Bush just wants the implosion to occur on the next administration's watch after his clock runs out so it can all be blamed on them. Seeing that it's quite possible that the next administration will be Democratic/Hillary this is a very Rove-ian strategy to score a long-term win for Republicans.

Politics uber alles.

[tabs]

If your an institution holding one of these pieces of paper (pension fund) and you can't trade that piece of paper it becomes valueless. If you need to raise cash to operate you have to sell other assets that are good to keep afloat. This problem has come close to seizing the financial system up all together. Effecting everyone and everything not only the poor schmuck with the home loan and institution that holds the paper.

Lenders and Banks don't hold this paper they bundle the loans and sell it as commercial paper to....virtually everybody...Hedge funds Indivduals , Pension Funds, Corporations, Banks, Foreign Entities etc.

[jorian]

Limiting the return of already suspect mortgage backed securities makes them even less marketable.

[tabs]

By freezing resetting of the loans they are buying time which they hope will let things work out. Time is needed to work things out, to advert a panic. The Great Depression was brought on by a lack of liquidity. The margin rates in the 20s was 90%, when the margin was called everybody had to sell all at once to keep liquid. As a consequence there were not enough buyers to support any Stock Market price level. The result was a crash that was heard for a decade, and was alleviated only by a World War.

[jkarolyi]

So tabs, you're saying that this bill is mostly to buy time to allow the lenders and institutions that hold these mortgages sort the good mortgages out from the bad? So they can re-package and sell off the "good" mortgages to raise capital to cover the bad? If so that makes some sense.

[tabs]

Originally Posted by jkarolyi

So tabs, you're saying that this bill is mostly to buy time to allow the lenders and institutions that hold these mortgages sort the good mortgages out from the bad? So they can sell off the "good" mortgages to raise capital to cover the bad? If so that makes some sense.

Yes, thats the jist of it.

[red-beard]

So, who are we going to go to war with next? China?

[tabs]

Originally Posted by red-beard

So, who are we going to go to war with next? China?

If Bush had his way it would with Iran. However Bush is like the cat with a tincan tied to its tail. Not gona happen. Unless of course an "incident" occurs.

China..don't make me laugh.

Pakistan is the new hot spot.

[legion]

Who is going to pay for it?

Those of us who bought within our means and managed our finances. We always get tapped to cover the irresponsible and ignorant.

[red-beard]

The real problem here is that contracts aren't worth crap and people will not want to invest in the US. We will all suffer.

[Rick Lee]

I think you have to be current with you loan to get this special deal, so it will weed out a lot of folks already. As RandyP mentioned in the real estate thread, people with option ARM's, which have negative amortization if you pay only the minimum, will have even more incentive to walk away once this freeze expires. Think about it. If you make just the minimum payment on an option ARM, the difference between that and the normal rate payment gets tacked onto the loan balance. This is ok for people who use that savings to invest in something that pays returns at a better rate than their mortgage is set to and then pay it down at the end of the year. But most people in these kinds of loans don't do this. So having their teaser rate frozen only exacerbates their upsidedown position. Each month they keep making that low payment means more and more is being tacked onto their loan balance. Once the game is up, there's nothing they can do but walk away from it. Surely, someone in the gov't. must know about this. It's too big to ignore.

[widgeon13]

If you believe the Bush/ Paulson proposal is bad, Hillary thinks it doesn't go nearly as deep as it should.

"Hillary Clinton, New York senator and leading Democratic presidential candidate, said the administration was not doing enough to help homeowners.

"It appears that the president is pushing a freeze for a very narrow group of borrowers. That is unfortunate because this crisis demands a more comprehensive approach," she said. "

If Hill had her way she would bankrupt the country very quickly. A 20% correction will look like spit in the ocean.