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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