Bush Defers Mortgage Problem to Next President

President Bush has decided to delay the coming mortgage crisis and defer it to the next president:

WASHINGTON (AP) - The Bush administration has hammered out an agreement to freeze interest rates for certain subprime mortgages for five years to combat a soaring tide of foreclosures, congressional aides said Wednesday.

The aides, who spoke on condition of anonymity because the details have not yet been released, said the five-year moratorium represented a compromise between desires by banking regulators for a longer time frame of up to seven years and mortgage industry arguments that the freeze should last only one or two years.

Another person familiar with the matter said the rate-freeze plan would apply to borrowers with loans made at the start of 2005 through July 30 of this year with rates that are scheduled to rise between Jan. 1, 2008, and July 31, 2010.

The Dem candidates aren't happy, mainly because this plan doesn't use taxpayer money and doesn't freeze foreclosures. They would rather pour billions of taxpayer funds into the mortgage market to subsidize homeowner's and lender's bad decisions, and force lenders to stop foreclosing on bad loans. You realize, of course, that the moment you announce a freeze on foreclosures thousands of homeowners stop making payments and the situation rapidly deteriorates for the lenders.

It is not the federal government's job to protect Americans from their bad decisions. I think the best thing to do is take the hit now and let the mortgage market clean out the deadwood, be it companies who made bad loans or homeowners who accepted agreements they couldn't possibly manage. The result will be a healthier real estate and financing market in coming years. With Bush's plan we've simply deferred the problem.

Let me turn the situation around a little bit. When I bought my house in 1990 I took out a 5/25 loan. That meant the rate was fixed for 5 years and then would go through one adjustment, depending on the rates and indexes agreed to in my loan contract, and then would be fixed at the new rate for another 25 years. As it happens when that adjustment finally came due rates had gone down and my new adjusted rate resulted in a payment drop of several hundred dollars a month. I played the rate lottery and won.

What if my lender had gone to the federal government and demanded that I keep paying my old higher rate for five more years because it wasn't fair to the lender that my payments had gone down and it was going to cost them money. I think everybody would agree that a move like that wouldn't have been fair. Yet that's no different than what borrowers are asking the government to do today.

Moves like what President Bush is proposing are guaranteed to raise the cost of borrowing in the future because lenders will have to build extra costs into their products as a hedge against another government move which negates the terms of their loan agreements. It will also make these loans less lucrative on the secondary mortgage market. Who wants to buy a loan that may not pay off as promised?

The Feds need to leave the mortgage market alone and let it self-clean as it always has.