Once again good intentions are poised to hurt far more people than they help as a government-imposed "solution" to the mortgage "crisis" looms.
The Treasury Department and mortgage industry leaders are putting the final touches on a plan that could save struggling homeowners from foreclosure by freezing interest rates before they reset sharply higher. ...
Regulators and the mortgage industry are focused on restructuring 30-year subprime loans that carry fixed interest rates for up to three years but then reset at higher rates, hitting borrowers with sharply higher costs. ...
As envisioned, Treasury's plan would effectively extend the fixed-rate period for stressed borrowers, shielding them from a payment spike that could push them into foreclosure.
We can at least be thankful that taxpayers won't bear the direct cost of bailing out these foolish borrowers and lenders, but there's no doubt that that this government plan (probably imposed under threat of criminal prosecutions and civil fines) will severely distort the market to the detriment of the companies and people who were wise enough refrain from undue risk-taking.
More directly to the point, this type of bailout is a bit of a slap in the face to those who approached the housing/mortgage market the "right" way. Rather than buy more house than they could afford at rates that it now turns out truly were too good to be true, there were responsible people who did the right thing instead. They bought smaller homes, used more expensive (initially) fixed rate mortgages, saved and waited, and/or practiced a number of other virtuous behaviors. All the while, they watched throngs of people less able than they move into newer and nicer houses all around them.
Their reward for waiting and doing the right thing? Higher mortgage rates across the board, as lenders have (over)reacted to the fallout of their earlier loose lending practices. Now with the bailout, these lenders are going to be aritificially holding lending rates higher for everyone else to compensate for the lost revenue caused by holding these subprime teaser rates artificially low. That's not the only impact of the bailout on these responsible folks. Those that have waited patiently for the housing market to correct will now see home prices artificially propped up as these now-subsidized loans don't fail. It may seem heartless to view it that way, but the reality is that stepping in here will artificially prop up home prices. Those poor suckers that waited patiently for a correction while saving their money? Maybe they'll learn a lesson and be a little more reckless like everyone else next time around.
Yes, I want the foolish borrowers thrown out of the houses they can't afford. Yes, I want the foolish lenders to lose tons of money and possibly go bankrupt. Yes, I want housing prices to drop rather then be propped up artificially. Yes, I want the stock market to drop to reflect the true value of assets the stocks represent. All these effects look scary in the short term, but historical evidence shows that the immediate pain would produce greater wealth in the future.
One of the few advantages that government "experts" should have over the average consumer and corporation is a willingness to take the long view and work in our country's long-term interest. If government is going to be as short-sighted as the rest of us tend to be, then what purpose does it serve?