Mortgage Companies to Freeze ‘Teaser’ Rates
The Bush administration has strong-armed mortgage companies into freezing teaser rates on old loans.
The Bush administration has come up with a plan to help strapped homeowners facing a daunting jump in their monthly mortgage payments. The proposal, reached in negotiations led by Treasury Secretary Henry Paulson with the mortgage industry, would freeze introductory “teaser” rates on subprime mortgages, preventing them from resetting to higher rates for five years.
President Bush, who was scheduled to announce the agreement after a meeting with industry leaders at the White House on Thursday, has stressed that the deal is not a bailout because no government money is involved.
But of course it’s a bailout. People who made bad choices are being rewarded while those who paid more for more prudent loans — or decided they couldn’t afford a home with a non-gimmicky mortgage — are being penalized.
Politically, however, this looks to be a bold move that will help restore confidence in the economy. And the Democrats’ criticism is pretty weak:
Two Democratic presidential contenders, Hillary Rodham Clinton and John Edwards, complained Wednesday that, given the risks to the economy, Bush’s proposal did not go far enough. They put forward their own plans that would not only freeze mortgage payments but also declare moratoriums on further foreclosures for a period of time as a way of adding pressure on lenders to reach at-risk homeowners.
Logically, of course, they’ve got a point. If government is going to step in and prevent the market from punishing bad behavior, why draw the line at 5 years?
Duncan Black contends that stipulations in the plan will actually have the perverse impact of helping those who need it least, since to qualify your must still be worth at least the amount borrowed. Then again, it also excludes those who can “afford” to pay the higher rate, which is simply bizarre. If government is going to bail people out for poor choices, then it should be done on an equal basis.
Moreover, as Stephen Green points out, this plan will almost certainly mean that banks will be much more careful about whom to lend money. That’s probably a good thing in the aggregate. On the other hand, though, it means that a whole lot of people who would have managed to get into a house and make their monthly payments won’t get the chance now. (He also evokes Nixon’s wage and price controls, which immediately jumped to my mind, too.)
Ordinarily libertarian Megan McArdle, though, is sanguine. While she acknowledges that the plan is “imperfect,” and will create major market distortions, she figures it’s “worth it” because “the market is currently in the grips of terror” and this “may allay those fears enough to ease the credit crunch.”
The problem, as always, is that the government has no idea what the effects the move will have. It’s almost certainly voodoo economics in just the same way as Nixon’s move. But, as my colleague Dave Schuler often points out, smart policy and smart politics are seldom the same thing.