Bush Offers Subprime Help

The first and most important thing to note about the subprime mortgage relief plan President Bush announced yesterday is that it is entirely voluntary. There is no force of law behind it. The mortgage lenders have largely agreed because doing nothing is even worse. The president is keeping his free-market principles intact, and as a result, the plan will be less effective than it otherwise might be. Nevertheless, action of some sort will cheer the markets.

The problem is a whole slew of adjustable rate mortgages, perhaps 2 million, that are going to reset in the next few years from 7% or 8% to as much as 11%. Quite simply, some people won’t be able to meet those higher payments. Mr. Bush’s plan is to offer them some help without indulging in a wholesale bailout of speculators, slumlords and lenders with poor controls.

There will be a five-year freeze on interest rates for mortgagees who are current in their payments. Anyone who is more than 30 days late or who has been 60 days late at any time in the last 12 months is disqualified. Those eligible have to live in the residence in question, and anyone whose rate has already reset is out of luck – the plan only covers those resetting in 2008 or later. And if the borrower took out the loan before 2005, too bad.

Of the 2 million subprime mortgagees in the sinking boat, maybe 10% or so will be helped out. However, that’s still a couple hundred thousand families, and that isn’t a bad thing. Moreover, it sets a precedent and a benchmark for the industry to absorb in the coming weeks and months. Above all, it gives Wall Street and the dollar traders reason to stop panicking and start thinking about the US housing market. It’s not good, but there’s too much emotion in the pits right now.

However, there are some losers here. The Washington Post mentioned “Darren McKinney, 48, a renter in the District [that’s Washington DC], said he has been waiting for housing prices to fall so he can buy a condo without resorting to a dubious loan. He turned down an opportunity to buy his 600-square-foot apartment for $310,000 in late 2004 because he thought it was ‘absurdly overpriced’.” His complaint, “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.” Thanks to this attempt to save the mortgagees, Mr. McKinney will be renting for a while yet.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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