Mortgage Companies to Freeze ‘Teaser’ Rates

The Bush administration has strong-armed mortgage companies into freezing teaser rates on old loans.

Mortgage Companies to Freeze Teaser Rates A foreclosure sign tops a sale sign outside an existing home on the market in northwest Denver in this Aug. 29, 2007 file photo. The Bush administration has hammered out an agreement with industry to freeze interest rates for certain subprime mortgages for five years in an effort to combat a soaring tide of foreclosures, congressional aides said Wednesday. (AP Photo/David Zalubowski, file) 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.

Others weighing in: Fritz Schranck, Pejman Yousefzadeh, Kevin Drum

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James Joyner
About James Joyner
James Joyner is a Security Studies professor at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Scott_T says:

    The five year freeze is to drop the unfreezing in the next president’s lap during the 2012 election.

    Duh. 😀

    Either the next president shall unfreeze it before 2012 if everything has corrected itself, or if (s)he see’s (s)he’s in trouble, (s)he won’t unfreeze it, and let it be something to debate during election runoffs and drop it in the next electee’s lap once he’s elected.

  2. C.Wagener says:

    This is terrible public policy, but better than many of the other things being floated. The constant assertion that home ownership is inevitably positive and worthy of tax breaks is dubious. Buying a house ties up large amounts of money and reduces people’s mobility, harming careers. I think it’s rare than anyone should be a home owner before their 30th birthday.

    Unfortunately we can’t complain about the politicians, since we are getting policy the public demands. Nothing bad can happen, and if it does it must be the government’s fault, not bad decisions by citizens.

  3. Scott_T says:

    And of course, everyone in 2012 will still blame Bush for shaping that election.

    Bonus points for Dubya!

  4. Anderson says:

    I’ve decided that I’m against guard rails on highway curves, because they waste my tax dollars to protect people from their own bad choices.

  5. James Joyner says:

    I’ve decided that I’m against guard rails on highway curves, because they waste my tax dollars to protect people from their own bad choices.

    Presumably, though, there’s some limit to what you’re willing to invest in this regard? If guard rails were a thousand times more expensive, you’d likely be against them? Or at least ration them more prudently than is now the case?

    And people go off the road for all manner of reasons, most of them not related to poor driving. Getting into a cheaper mortgage with a teaser rate, by comparison, is always a conscious decision made over a relatively long period.

  6. southdakotaboy says:

    Of course this is good policy in the fact that it will hopefully stop the left from doing something even more harmful. That is all it boils down to. Hillary has already been issuing threats to Wallstreet about what she will do if they don’t do what she says. Anything that helps stop that communist in a Pink Pantsuit is good policy.

  7. Mike says:

    Ah yes; protecting people from themselves – the new role of the gov’t. If you can’t figure out what you can and cannot afford then you should not be able to own it.

    Don’t buy a home until you are 30? I made over a year’s salary on my homesale before I was 30 and now pay a mortgage on a home that i can afford – I could have bought a home twice the size the one I am in now, but that would 1) be dumb b/c I don’t need it 2) too expensive. maybe I will just refinance, take out all the equity, and buy lottery tickets.

  8. Scott Swank says:

    For what it’s worth, Paul Krugman is no fan of this administration but he endorses this plan. It seems like a fairly reasonable step.

  9. Dadmanly says:

    Reasonable, I suppose, if it chastens lenders in future, strengthens markets, and sets some kind of “not again” to both lenders and borrowers for this amnesty for “stupid.”

    Meanwhile, those of us who read loan terms, do the right thing, don’t look for bailouts, buy what we can afford or wait until we can, can only draw one conclusion.

    The New AmericaTM will never let you suffer for your own greed, incompetence, or selfishness.

    I referred above to baloon borrowers as stupid, but who’s the fool if there’s no penalty to getting loans I can’t pay for stuff I can’t afford?

    Keep it up America. Keep looking for Government to protect you even from the stupid things you do to yourself, and eventually, we’ll all be entirely protected from Freedom of any kind.

    But right now, I have to look into getting myself a big baloon mortgage, cause I don’t want to miss out on the big cash bailout!

  10. >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.”

    How exactly adding an addition risk (that of the loan agreement being arbitarily re-written to suit political pressure) going to ease the credit crunch? In my mind, this move is likely to make credit even scarcer.

  11. C.Wagener says:

    Mike,

    You say:

    “Don’t buy a home until you are 30? I made over a year’s salary on my home sale before I was 30 and now pay a mortgage on a home that i can afford…”

    Read literally you bought a house you couldn’t afford, but got out before you had a problem. You had carry costs on your down payment, any additional equity, insurance, maintenance, etc. Then you had leveraged risk. Do you think your risk adjusted return was worth it? You cannot say everything was cool because in the end it worked out. That’s what this is about. People assumed prices would always go up and now they’re loosing a year’s salary.

  12. underground says:

    Well I’m 25 and just bought at the top of the bubble last year. No problems here. Its a modest house, its a fixed rate and there’s no penalty for early principle payments. Assuming an 8-10% annual loss, maintenance, and extra payments, its like the exact same cost renting would have been..(its not like rental prices are going down)
    And I think I’m overestimating the devaluation of the last year, just to be safe (location is pretty good, lot of dense commercial zones popping up).

    This bailout may be “minor” in terms of economic impact, but its a MAJOR slap in my face. If we had gone for an ARM with an intro rate when interest rates were at record lows we could probably be saving thousands in interest payments through Bush’s plan, depending on how they view the incomes of a teacher and a financial aid worker.

    Silly me, I thought the low fixed rate was the safe and prudent way to go.