With the announcement late today that an agreement was near between the Bush Administration and Congress on a program to freeze interest rates of sub-prime mortgages to avert a housing "crisis," the government is overstepping its bounds into the market and setting a dangerous precedent for government intervention and bailout of a non-crisis "crisis."
Two independent parties, a mortgage broker and a homebuyer knowingly entered into a contract setting out terms and conditions of payments. Any homebuyer knows there is risk in their purchase. If they lose a job or are for some other reason, unable to pay, they could lose their home. That’s why many choose to rent. Costs are lower and the ability to change your housing based on income is easier.
But the danger in this move by the Bush Administration is sending a message that, it’s OK to spend over your head, or buy things you can’t afford — the government will come bail you out. If I go out and run up a big credit card bill on Christmas shopping and find out I can’t afford to pay, should the government step in and help me since my shopping, like the housing market, is a vital component of the economy.
To freeze rates for five years "hoping" the market will eventually turn is comical. What happens if it actually gets worse?
The market is self-correcting (if it hasn’t already). To pursue this proposal is an overreaction. Banks don’t want to foreclose. It’s a money losing proposition for them. Why would they want to pay the expense to go through the foreclosure process only to be stuck with an asset they can’t sell? The banks/mortgage houses should be left to fix the problem on their own. Instead, we’ve created a culture of dependency on government, where industry feels it can get government to act in its favor instead of relying on self-sufficiency. It’s disgraceful.
Oh and get this golden quote at the end of the article: "Mark Zandi, chief economist for Moody’s Economy.com, called the
administration plan a good first step, but said the government
eventually will have to go further given the problem’s size and the
threat to the economy."
HA! Moody’s telling us that the government needs to go further? They are one of the ones primarily to blame for this whole mess by ignorantly over-inflating credit ratings of mortgage backed securities. Moody’s and S&P screwed up big time, and they should suffer the consequences of such action, not get the government to step in and bail them out as well.