Let’s be clear...what is being discussed is unprecidented, in that the legislation would essentially order banks to continue to carry bad debts for up to 2 years, in the belief that will be sufficient time for the borrower to get his act together and refinance to a better rate.
The problem is that even with 2 more years, many of these people who are in default and facing forclosure still won’t qualify for a prime mortgage, and all this does is put off the inevitable and extend the crisis.
Many of these mortgages need to be foreclosed immediately. And many of the lenders who are holding this bad paper, like Washington Mutual specifically, put themselves in this position in the first place, and do not deserve to benefit from their own misconduct.
I am not sure that Bush is proposing legislation. I think that the Treasury Department is trying to negotiate a deal to stave off bad legislation. If these private parties want to extend the teaser rates and prolong the inevitable, it is their choice. However, legislators are threatening action so I am not sure any deal is an arm’s length transaction. Legislators are having trouble with their strong arm tactics because of the diverse parties involved. This proposed deal will undermine investor confidence in mortgage backed securities. It seems that investors may prefer defaults to prolonged pain.
Yes, it will hurt the contruction and retail industries for a longer period in the areas where there’s lots of foreclosures if the banks are required to carry loans from unqualified buyers.
The problem is that even with 2 more years, many of these people who are in default and facing forclosure still won’t qualify for a prime mortgage, and all this does is put off the inevitable and extend the crisis.
This particular plan is not based on legislation, but by the Bush administration using the presidential podium to advocate changes by the largest mortgage holders. What he wants is to keep the teaser rates going for a while longer before they adjust, and stagger them out so they don't happen all at the same time. It is a free market solution, but it means that the lenders and bond holders accept that they must accept a lower return on their investments. This is possible if they understand that their return would not be higher if they had to deal with all of the forclosures in the market.
Also, there are other proposals in Congress, by the Democrats, which are intrusions into the market, and will have serious effects. They are proposing changes to forclosure laws which will allow a judge to unilaterally reset the interest rates in court. What kind of business climate would that create?
We also have the serious case of a judge throwing out flrclosure proceedings because the investors could not prove they held the mortgages.
Considering the options, if I were an investor or lender, I would think Bush's initiative is a lot less dangerous than the Democrat/court solutions.
Postpone is more like it. The Bush Administration has nothing to lose by brokering this deal. If foreclosures rise dramatically and home values fall preciptuously during the election year, it will be bad for the Republican candidates. However, if the Republicans lose anyway, the damage occurs when the Democrats are in charge.
Actually, from what I heard, if they paid on time before the adjustment and it was apparently only the increased rate that hurt them, they qualify.
If they were late even before it adjusted, no dice.