Thursday, December 06, 2007

Mortgage crisis market meddling: Will it work?

Here's a summary of the 'plan' the Bush Administration has put together to stave off a blood bath in the housing markets, courtesy of
What would the plan accompliPublishsh? The plan is limited and tries to help homeowners, not speculators. It specifically targets borrowers who have teaser rates that eventually reset to much higher rates. Typically the rates are low for the first two or three years and are known as 2-28s or 3-27s.

For these borrowers, a rate freeze would only prevent foreclosure in the short term. The freeze is voluntary for mortgage lenders, who have no real incentive to participate. Furthermore, the government has no plan to use federal funds to help homeowners make payments -- this doesn't look much like a bailout. Regulations on states would be loosened so that people who are struggling could receive additional aid. The Paulson plan would encourage states to increase aid to homeowners through the issuance of tax-free bonds.
With all due respect, this is both too much and too little. In other words, this is a complete waste. Read my past post, Mortgage mess: US Treasury to freeze ARMs?

It's too much because the market doesn't need manipulation. It needs a regulatory body that will somehow remove fraud and greed from the equation but let the fundamentals of supply and demand do its Adam Smith magic. Further, it will put a stop to any activities in the housing market. How is that? Well, if the current prevailing rate is 8% and I can freeze my 4% for 5 or 7 more years, why would I ever move? So, folks who might move into a bigger or more expensive house have a disincentive to do so. The only incentive is to move into a much cheaper house, such that the payment stays flat. The only way to do that is to finance a smaller mortgage. This will drive house prices down, if anything, worsening the problem.

It's too little because just a small percentage of borrowers used 2-28s or, who's it going to "help?"

I say, let the market decide. Put a regulatory body in place that not only has teeth but also the incentive to act.

More mortgage mess news:
WaMu leadership staying as investors wonder why