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.
My question: Is the mortgage holder going to take the loss in interest income? Or is the tax payer going to have to make up the difference? Our government is already deeply in debt, so, in the big picture, does borrowing more money to finance this whole mess seem irrelevant? Lastly, who is going to bail out the taxpayer?
Black powder Hunting
Jeff mixson brought to my attention the influence that the new proposed OSHA regulation would have on everyone that likes black powder hunting and possibly on other as well.
I personally dont practice this old but renewed type of hunting, but s…
Think the crisis might be slightly deeper then it seems.
These kind of corrective measure are common in many countries especially in Europe, but the claim that people and business should balance themselves without hysteria and overreaction of the government is right.
Government seems to care for the stability of banking industry because it can create a chain reaction.
Chris,
You are right about Moody’s and S&P overrating the subprime-backed securities. But you may be overlooking the role of government in that as well. These ratings agencies are considered “Nationally Recognized Statistical Rating Organizations (nrsros)” and are government-chartered corporations. In short, Moody’s and S&P dominate the ratings market with a government-created “partner monopoly.”
Also, in the 1970s our friends at the SEC declared that ratings agency information was a “public good” – thus ending their previous practice of providing ratings information solely by subscription. This paved the way for a more active role of ratings agencies in helping to get investments top rakings. Another fact is that Freddie and Fannie (the largest secondary buyers of loans) are required to get 2 ratings before purchasing loan packages. Freddie and Fannie also are directed by HUD to finance a certain percentage of loans to “underserved” and “low-income” people.
So Freddie and Fannie face pressure to finance high risk loans, and the ratings agencies have virtually nothing to lose by approving high risk investments, because they have practically no competition (thanks to the gov’t).
So government mandates to increase high risk loans, along with government regulation creating a virual monopoly on the agencies approving the risky investments, combines to help create a “crisis.” And now the government thinks they will fix everything?