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Hillary's Unworkable Plan to Freeze Interest Rates

As Joe Birger points out, Hillary's plan to "freeze" interest rates to fix the subprime mortgage mess doesn't make a lot of sense:

"I have a plan - a moratorium on foreclosures for 90 days [and] freezing interest rates for five years, which I think we should do immediately," Clinton announced at what was the last Democratic debate before the Nevada Caucus on Jan. 19. A 90-day moratorium on foreclosures would throw a lifeline to some deserving homeowners, though I suspect it would only delay the inevitable for most. That's not my beef.

Where Clinton goes awry is her proposal to freeze mortgage rates for five years, which is essentially a much broader version of a deal President Bush recently hammered out with lenders to assist some subprime borrowers. If Clinton's only goal were to bail out homeowners facing steep rate resets on adjustable mortgages, her plan would work just fine.

For everyone else though, such a freeze would be disastrous. Interest rates on new mortgages would skyrocket - perhaps past 8 percent, as the mutual funds, pension funds and other investors who typically provide capital to the mortgage market shift their money into other investments where the government isn't impairing returns. With higher mortgage rates eroding buying power, the downward pressure on home prices would only increase. Lower home prices would lead to even more defaults, as more folks who'd lost the equity in their homes choose to walk away from their mortgages.

It seems to me fundamentally unfair to force the rest of us to pay a penalty because some people chose to buy homes they couldn't really afford. I think we would be much better off assisting those people through the foreclosure process and getting them into rentals or homes they can afford. This way prices in the housing markets would return to where they would have been had this orgy of interest-only mortgages with no income verification had never occurred.

I don't think we can fix this problem without addressing the fundamental problem which is that a lot of people bought homes they couldn't really afford. If we bail them out we are just going to encourage another speculative housing bubble to form again a few years down the road. The worst thing the government could do is adopt a plan like Hillary's which would make the rest of us (who chose not to take out loans we couldn't afford) pay the price for other people's mistakes.


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Comments (8)

Steve Crickmore:

Sometimes I don't think Hillary's mind is that flexible or brilliant really, perhaps shaped by her experience of being in government power for 25 years 'Freezing interest rates for five years'. Your're exactly right money will flow elsewhere and this seems to penalize those that chose to be prudent and not get in over their heads. Her plan may go as far as her 5 thousand dollar baby bonus checks. That lasted a day until someone did the math and discovered how expensive it would prove.

Lee Ward:

Hey guys, my understanding of the Clinton Plan is that it freezes interest rates on existing loans - which is how it helps the existing home owners with the existing crisis. Edwards is calling for a 7 year freeze instead of Hillary's 5 year freeze. If, in the process, it also freezes future sub-prime and drives money out of the sub-prime market, so much the better. It's the sub-prime crisis that is, in part, driving the country into a recession. Shutting down the sub-prime end of the mortgage market looks like a good thing to me.

I don't buy Fortune Magazine's analysis and theorems on this at all.That's the source of this analysis, if anyone bothers to click through on the link in this post. It's obvious they will spin this -- they too are in the pockets of corporate America.

What Obama is calling for on this issue is more and better disclosure, which doesn't help the Americans who are already in hot water and losing their homes - but it does protect the big Wall Street banks that are backing Obama.

Wow, I've never seen a Democratic presidential candidate come down on the side of the huge Wall Street Banks who have their wankies out on the chopping block on the sub-prime mortgage but as I pointed out in my recent post "The Debunking of Barack Obama" the Wall Street banks, who are protected from harm by the Obama proposal, are among the big money backers who are behind Obama.

The Democratic candidate of "change," for example, has raised nearly $100 million in campaign contributions, nearly as much as the Hillary Clinton money machine. Three of his four largest group of bankrollers are executives of Wall Street giants Goldman Sachs, Lehman Brothers and JPMorgan Chase.

I guess then we shouldn't be surprised that Obama is protecting them, but to see a Democratic presidential candidate -- especially one like Obama who spouts off about "change" and "hope" -- choosing big business bankers over average Americans who are losing their homes - wow -- all I can say is wow.

Shutting down the sub-prime market will just cut many people out of home ownership. Most sub-prime mortgage holders don't default. People shouldn't take out ARMs. Hillary is pretty stupid and a huge liar. She knows her 'plan' would never happen. She just wants the Rubes to go "Wow, I'm voting for Hillary cuz she just cares so much!"


absurd thought -
God of the Universe says
forgive all debts

settle all accounts
no one owes anything


absurd thought -
God of the Universe says
make housing costs look cheap

go paint a rosy picture
just get people to sign up


http://www.stophernow.com/
.

Lee Ward:

By the way, I've posted a response to this post here.

Lee Ward[TypeKey Profile Page]:

Oh that's right. Sometimes I forget you're a Republican, Larkin.

"That was my understanding too. She obviously can't freeze interest rates on new loans because that's determined by the marketplace. Unless of course we want have Soviet Union style centralized command and control of our economy.

Since the rate freeze was on existing loans, in my analysis this rate freeze will have zero effect on interest rates on new loans - contrary to the whole Fortune Magazine enchilada...

This enchilada:

For everyone else though, such a freeze would be disastrous. Interest rates on new mortgages would skyrocket - perhaps past 8 percent, as the mutual funds, pension funds and other investors who typically provide capital to the mortgage market shift their money into other investments where the government isn't impairing returns.

...is in my view Bullshit.

The fact that the rate freeze was announced by Bush 6 weeks ago and there has not been any signs of skyrocketing interest rates since, backs up my claim.

But tell us how long you'll wait and watch the mortgage markets before you agree that Fortune Magazine sold you a bill of goods, Larkin?

Steve Crickmore:

How we cashed in before the housing crash, Sunday Los Angeles Times article.

Wowsas:

This analysis is dead wrong, and lacking in facts.

1) In the short term, there is ALREADY a dearth of investors for non-agency loans (loans not bought up by Fannie or Freddie), and rates are ALREADY high. This is one reason why everyone from the Bush administration to liberal Democrats is now pushing for raising the GSE loan limits. So Hillary's rate freeze plan will clearly not drive up short-term interest rates among non-agency loans. And since the GSEs have to respond to the government, there's no reason to think their rates will skyrocket in the short term.

2) Also, Hillary's plan is relatively narrow. It applies to basically 04-07 vintage 2/28 and 3/27 subprime ARMs. Which are already in the toilet, and may never come back. We may never see the boom in 2/28 and 3/27 subprime lending that we saw in the past 7 years. But that hardly means it's a result of Hillary's rate freeze.

3) In the long term, it's a bit simplistic to claim that Hillary's plan will cause investors to shy away from US mortgages and interest rates to rise.

a) For one thing, it's well recognized that the current mortgage crisis is unique. So unique actions are expected. It's not as if Hillary was calling for a five year freeze on credit card rates, or food prices, or other areas. She's calling for a one-time temporary freeze in response to a historically unique situation.

b) For another, ask yourself this question: which is more likely to cause investor reluctance to invest in US mortgages: a onetime government intervention that arguably doesn't even affect overall NPV for the average mortgage trust? Or a 20-30% slide in US home prices accompanying a record number of delinquencies and foreclosures? If you say the former, you might just be a unreformed Ayn Rand libertarian, and I ask you to come join us in the real world.

c) WE ALREADY HAVE SCARED AWAY INVESTORS. The total boondoggle of US mortgages already means that the mass global investment in US mortgages is a thing of the past. No way that German, French, Saudi investors or pension funds will gobble up US MBS anytime in the foreseeable future.

I just don't see the argument here that Hillary's plan raises rates. It clearly doesn't affect GSE conforming loans. It's limited to an area of mortgages that may already be seeing its death knell. And it's in response to a fairly unique event that has lots of people calling for unprecedented one-off solutions.

Lee Ward:

Thank you, Wowsas, for taking the time to thoroughly debunk this.

I agree that this argument was crap -- specious at best, and disingenuous at worst. It was one of the more blatant bits of misinformation I've come across during this campaign.

I don't believe Larkin was conscious of the error when he posted it. Fortune Magazine obviously fears Clinton more than Obama, and pushed this piece-of-crap analysis the evening before the Nevada caucus, and a lot of Obama supporters picked it up and ran with it without understanding that it was bullshit.

I responded with this...


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Publisher: Kevin Aylward

Editors: Lee Ward, Larkin, Paul S Hooson, and Steve Crickmore

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