Saving the Day

Mr. Bush's heart is touched. (Also, he doesn't want to go down in history as the president under whom millions of people were foreclosed out of their houses, crashing the economy.) He's going to save the day. He's going to freeze interest rates on those awful adjustable loans for five years:

• If you're living in the home and it's your primary residence.
• If you're current on your payments.
• If you got the mortgage between January 1, 2005 and June 30, 2007.
• If your interest rate will reset for the first time between Jan. 1, 2008 and June 30, 2010 by more than 10% on the first reset.
• If you can't make the higher payments.
• If you can't qualify for refinancing.
  

Behind on your payments already? Got the mortgage in 2004? Mortgage already reset once? Hasta la vista, baby. The article in today's San Francisco Chronicle suggests that something like 145,000 homeowners will be helped by this (estimate from the Center for Responsible Lending); whereas some 2 million mortgages will reset over the next couple of years.

So this isn't a real attempt to help anybody; this is a stupendous exercise in government CYA. Now let's talk about some of the real issues.

First of all, nobody beat these people over the head with a club and forced them to sign off on these loans. This was a voluntary business transaction, and they didn't read all the paperwork, and now they discover that the broker lied to them about the rate increase and they can't afford the loan payments. Under normal business practices in this country, they are SOL. If a business borrows money to expand its operations, and instead the business goes bust and can't repay the loan, it declares bankruptcy. Yes, these are human beings not businesses, and yes, my heart bleeds for them, and yes, many of them were deliberately deceived by brokers hustling for high commissions on loans they personally had no stake in, but dammit. There's such a thing as personal responsibility. Are we responsible for our actions all the time, or only when they work out right?? Can we spell Moral Hazard? I don't have to worry about it, the Guvmint will bail me out. If it can get the hotline phone number right.

Second (and this one absolutely floors me) this suggestion is coming from a REPUBLICAN president! A Republican president is suggesting that, in order to bail out the Little Guy, we must mess with the free market and rewrite contracts that have already been signed and performed under for up to 2 years. I don't think even FDR ever tried to rewrite contract law. Whatever happened to the Republicans as the party of small government and less regulation? (Of course, if you're going there, whatever happened to Republicans as the party of fiscal responsibility, but that's another whole post.)

Full disclosure: I am a Democrat (God help me), not a Republican.

Third, this whole thing assumes that the loan servicers are the ones who will determine the last 2 items on the list above (can't make higher payments and don't qualify for refi). The problem with this goes back to the problem with this entire Donnybrook: the loan servicers aren't empowered to make changes to the loan contracts because They. Do. Not. Own. The. Loans. They are bookkeepers and administrators; they track loans, collect payments, and pass the dollars on to the people who do own the loans.

And who does own the loans?? If I say "hedge fund investors" you'll throw something at me, but it's true. Your neighbor's house loan was "securitized" (see my post from September): bundled together with a bunch of other loans, the bundle divided up into pieces, and the pieces ("tranches") sold at prices, and interest rates, based on their credit rating. Which has nothing to do with the individual credit rating of the owner of any one of those loans. In fact, I'm not sure you could identify the substantive "owner" of a home mortgage that was securitized; and if you could, it would be more than one person (or entity); and every one of those multiple entities would have to sign off on a change to the contract. Unless the government rewrites the contracts by fiat, which is what Dubya is proposing.

And if that happens, the people who bought those securitized mortgages will lose money. Figure how likely it is they'll cooperate with this. Of course, they're going to lose money anyway, because they backed a dead horse; but with this plan, they'll have somebody to sue - and it'll be our government. Isn't that a great idea??