The Treasury has been touting its plan to freeze borrowers' interest rates at the "teaser" rates before they reset higher. There is a lot of skepticism about this plan as reported by Reuters:
But many analysts note that renegotiating terms for loans will just postpone the inevitable -- writing them off. A few extra quarters of payments is a positive, but in the end, the loans must be written down because they will not earn the expected return.
"If you're a bank and you made a loan at a teaser rate because you wanted a higher rate longer-term, you're not going to get it now," said Robert Albertson, chief strategist at Sandler O'Neill & Partners in New York.
The administration wants to present this as a plan to help the little people, but in reality it's designed to prop up the big banks and financial interests who are taking it on the chin:
The Treasury's hope is likely that banks can forestall writing down too many mortgage-related assets, while economic growth in other sectors accelerates, allowing banks to generate higher profits and rebuild capital, analysts said.
Many analysts aren't buying it:
"If you postpone the inevitable, you'll just draw out the pain for a longer period of time," said Nandu Narayanan, a portfolio manager at hedge fund Trident Investment Management.
"If there's uncertainty about what banks have left on their books, they'll have more difficulty raising capital, which might hamper their ability to continue to grow their business and fund growth in other parts of the economy,"
In my opinion, a much better idea would be to assist people through the foreclosure process rather than attempt to keep them in homes that they really can't afford. The banks and lenders should take the hit on these foreclosures which is estimated to average about $50,000 per foreclosure. If this requires the banks to report some bad quarters on their financial statements then so be it. Our economy cannot be entirely "risk-free", there has to be a penalty for making unwise decisions like lending to people who can't afford to make the payments on the loan you've written for them.
In addition, the government should launch an investigation into the predatory lending policies of the banks and mortgage companies that suckered so many people into these bad loans. I know some people who signed up for these loans and had absolutely no idea that the initial teaser rates would rise dramatically after a couple of years. The mortgage lending industry invented these absurd "innovations" like interest-only loans, no money down loans, and abandoned their customary practice of verifying the income that applicants claimed. They are the ones who should pay the price for their ways.
The Treasury's plan to keep people in their homes only prolongs the inevitable collapse in the real estate market. There is a natural cycle to these economic patterns and we have to let that play out. The fact is that real estate went up too far and too fast without the support of underlying fundamentals (e.g., rising incomes and rents). The government and the Fed created the real estate bubble in order to pump up the economy and bail us out of the aftermath of the stock market bubble. Continuing to pump up the real estate bubble with this bail-out plan and lowering interest rates is counterproductive and will only delay the final day of reckoning.
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