It looks like the Government is once again aiding and abetting debtors in the repudiation of contractual agreements. Calling it an “interest rate freeze” does not mitigate this fact. As reported,
The plan would apply to homeowners who got adjustable-rate subprime mortgages between Jan. 1, 2005, and July 31 of this year and are facing a sharp jump in their rates before July 31, 2010…
Eligible homeowners are those with enough income to pay their mortgages at lower rates but not so wealthy that they could afford the increase in monthly payments.
So, there is no relief for those borrowers who are sound credit risks. There is no relief for borrowers who took a mortgage during the peak of the boom (e.g., 2003, 2004) and whose rates have already reset at least once. There is no relief for those people who haven’t (yet) had trouble making their payments. And there is no obligation to honor a contract to which you voluntarily consented, provided that you merely thought it would all work out to your benefit.
The agreement reached yesterday, to be announced this afternoon contains provisions aimed at preventing “speculators” from benefitting.
News Flash: it is no less speculative to borrow more than you can afford through a teaser rate in the hopes of selling the home three or four years hence, than it is to borrow more than you can afford through a teaser rate in the hopes of selling the home three or four weeks hence. Arguably, the former is far more speculative, because it involves a longer timeframe and concomitantly more uncertainty and exposure to risk.
But others aren’t so sure, including Representative Adam Putnam (R-FL), stating that his “[B]iggest concern is that there are a lot of Americans who are making their mortgage payments, they are current, and the benefit won’t go to them.”
One DC renter laments,
There are those of us who purposely sat on the sidelines during the course of the last three years while the senseless frenzy was going on, and we presumed the free market would be allowed to correct itself. The government is now meddling in the market and looking to prop up lenders and borrowers alike, and those of us who wisely bided our time get screwed.
Senator Clinton, however, takes has the opposing argument, “Wall Street helped create the foreclosure crisis, and Wall Street needs to help us solve it.”
Of course, to be intellectually, logically, and economically consistent, H-Rod would have to admit that the Federal Reserve was the prime mover for the current mess. Had interest rates not been fixed well below what anyone with even a rudimentary understanding of economics would identify as the natural rate of interest for several years, had the money supply not been spiraling out of control, this “problem” wouldn’t exist. Home values wouldn’t have doubled or tripled in a five-year period. Nobody would have borrowed money with creative instruments like adjustable rate mortgages, and sub-prime borrowers would not have come into existence otherwise. It is of utmost importance to understand that Wall Street didn’t create these instruments for the sole benefit of borrowers — Wall Street created these instruments because it was obliged to lend its reserves, and for its own protection against the inevitable rise in interest rates that must always follow a prolonged period of monetary expansion.
The lesson to be learned from all of this is that there are no consequences for one’s actions provided enough people make the same mistake, and that there are really no perceivable benefits to refraining from jumping on the bubble-bandwagon du jour.
Previously relevant posts:
- Quick Hits (Item 3)
- Stated Income
- Bursting Mortgage Bubbles
- Serial Refinancing
- Housing, errr, Mortgage Bubble?
- Housing Bubble: A Primer