Talk about unfunded mandates—investors, the Fed and the federal government don’t want to touch that stuff, so they propose that local governments float bonds and be on the hook to bail it out.
Freezing ARM adjustments represents a mass invalidation of private party contracts and further wipe out investors. It also would likely cause no one to ever buy a mortgage-backed security again (at least adjustable ones). Minimally you won’t get the rate discount so much on ARMs because resets will no longer be credible. Guess what that will do to the market?
Finally, such borrowers are likely to be underwater equity-wise and can’t afford the payments on a fixed-rate mortgage. All this does is put the borrower in deeper in debt and ensure that they will leave a larger blast crater in five years.
Busts are part of the natural cycle of free markets. When you interfere with them, you either prolong them get a bigger explosion later.
True. However, it's only a portion of these ARMs that are affected. Furthermore, the losses are greater if these homes are all foreclosed at the same time and forced to be sold in a down market.
Unless the agreement is voluntary.
It also would likely cause no one to ever buy a mortgage-backed security again (at least adjustable ones).
Investors are already buying the newer securities, even ones that include subprime.
The banks need to get burned, so that they do not overloan like this again.
And the excessive demand drove out housing costs. This correction will make housing affordable again.