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article image500,000 Americans risk losing homes: Administration tries mortgage rates freeze

By Paul Wallis     Dec 6, 2007 in Business
Depending on who you read, the administration’s plan to try and take some of the heat out of the subprime mortgage situation is either getting a bit of bipartisan traction and/or generating a bit more political point scoring.
Reading Reuters and the New York Times, you could be forgiven for a sense of déjà vu. Or maybe some nausea. Don’t know who rewrote whom, but there’s a bit too much “hammering” for my tastes.
The New York Times:
The plan, hammered out after weeks of talks among Treasury Department officials, mortgage lenders and Wall Street firms, would allow distressed borrowers who are current on their payments to keep their low introductory rates and escape an increase of 30 percent or more in their monthly payments when the rates expire..”
Reuters:
The plan hammered out by the U.S. Treasury Department in talks with mortgage industry leaders would bring relief to many of the 2 million homeowners who took out adjustable rate loans with low teaser rates due to move sharply higher in the next year or so.
Officials fear 500,000 Americans could lose their homes
.”
Nice to see those half million people getting some recognition. Nothing like a mention in mass media to pay a mortgage.
This figures out as a five year rate freeze for subprime borrowers. The banks are expected to go into damage control on their loans, raise lending rates, and have already reverted to Puritan lending methods. Their balance sheets will be looking more than a bit sorrowful if they don’t tighten up, so this plan qualifies on face value as at least some protection for vulnerable borrowers.
However- Far be it from somebody with a memory to make foul aspersions on such lordly sentiments, but isn’t there a pretty healthy default figure with the existing rates?
Reuters again:
Democrats have welcomed the Bush administration's effort but have said more needs to be done.”
New York Times:
Democratic lawmakers and presidential contenders quickly criticized the plan as being too timid and promoted more ambitious proposals of their own.”
NYT says Hillary Clinton “called for a 90-day moratorium on subprime foreclosures and a rate freeze that would apply to all borrowers current on payments and some who have fallen behind.”
Meanwhile the guy with the happiest job in the world, US Treasury Secretary Paulson, seems to have been one of the driving forces behind the new administration approach. Another idea in this package is a temporary granting of authority to the states (and “localities”, which presumably means local government) to issue tax-exempt mortgage bonds to help borrowers refinance.
Wild enthusiasm for the plan, you couldn’t call it, but the idea that something’s wrong in the mortgage belt seems to be seeping through to the 2008 candidates. Other Democratic candidates have their own plans, and Republican candidate John McCain commented in the NYT that “What’s important is to stop the bleeding”.
That is a particularly appropriate comment, because this is a situation where the banks are bleeding, too. In fact, “anemic” would be a fair description at this stage. Money never really stands still, unless circulation is affected, by something like a credit crunch. This works like a tourniquet on business, and that carries through, inevitably, to the rest of the economy.
Banks borrow, too, and when a phrase like “money supply” is used, read “blood supply”. Say you borrow a few billion, based on your books, which say you’re good for that, because your assets are worth more than a few billion. Everyone’s happy, and bankers frolic like spring vultures in the sun.
But- say while frolicking, you lend a lot of money that evaporates into thin air. The asset values supposed to back that money go down, so you’ve taken hits both ways, and the people you’ve been borrowing from are in much the same position. Fortunately, granddaddy is a Central Bank, and comes in with some transfusions to keep the stone hearts beating.
Meanwhile, your borrowers, who are still nominal assets, are looking like they’re about to cheer themselves up and take a leap off a cliff. Then there’s the fact that you have to raise your lending rates, to try and get your own circulation running, and maybe even a pulse, one day.
Now- add to this the fact that you still have, sitting there on your books like a spilled red wine stain, something called subprime mortgage securities, which are now very debatable assets, worth several of those billions you were borrowing. I
Not a lot of frolicking happening, at this point.
Then, out of the southeast, comes The Masked Treasury Secretary, riding a noble administrative horse that must have taken quite a bit of drafting…
(I knew this analogy was leading up to some sick pun… I could hear it slithering around…)
…Well, riding a conceptual Clydesdale, anyway, and if short on silver bullets, (another thing Treasury and the finance sector might like to look at) he’s brought with him some plasma, and a payment rescheduling idea that might figure out as a sort of pacemaker, so those pesky borrower critters can still be assets.
Then things will be just dandy at the Sort Of OK Corral.
Anyone else finding it a bit strange that the happy ending for this story is that we get the buzzards circling again?
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