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Freezing Mortgage Rates Is Not the Answer

Bah! Call me Scrooge all you like, but the deal being worked out in Washington to freeze subprime mortgage rates is humbug on so many levels.

As we're all too aware, the housing boom led to excesses in mortgage lending that made buying a home sound like one of those used-car sales pitches we hear: "All you need is a job and a pen to drive away in a car today." While mortgage companies were slightly more restrictive, they were still loosey-goosey with their money, putting all manner of people into homes they couldn't afford.

People who shouldn't have qualified for a mortgage got their keys to a piece of the American dream. But the bill is coming due. The teaser rates are starting to reset. Homeowners are finding their mortgage payments jumping hundreds of dollars a month. Now they're crying foul, asking their local member of Congress to "Do something!"

Excuse me, but no one twisted their collective arms to sign. Sure, some cases of fraud misled certain buyers. But in many cases, I'm sure buyers were all too willing to conceal their scant credit and insufficient income.

There's a reason so-called "no doc loans" are also referred to as "liar loans." When lenders relied solely on buyers' word regarding their income, those buyers didn't have to show proof. Everybody won: The mortgage companies got to punch up their numbers, homebuilders unloaded inventory, and buyers got new homes.

Fixing a big mess
According to a report in today's Wall Street Journal, the deal being hammered out now brings together the likes of Wells Fargo (NYSE: WFC  ) , Countrywide Financial (NYSE: CFC  ) , Washington Mutual (NYSE: WM  ) , and Citigroup (NYSE: C  ) into a coalition to agree to a moratorium on the interest rate reset.

While the details are still unclear, it looks like the teaser rates (or at least lower rates) will be kept in place for possibly as long as seven years. It's also not yet known who will qualify to benefit from the rate freeze.

According to the investment bank and brokerage arm of Bank of America (NYSE: BAC  ) , some $85 billion in mortgage interest rates are resetting this quarter, with a massive $362 billion to come next year. The mortgage servicers involved -- the coalition, called the Hope Now Alliance, represents more than 84% of the subprime market -- are not being altruistic. Their thinking is it's better to lose a little now than lose a lot if the homes go into foreclosure.

Putting off the inevitable
The problem with the bailout, and the reason I oppose it, is that there are no lessons learned when buyers (and the mortgage companies) are saved from bad decisions. Thus, when the next boom arises, there will be little hesitation to do the same thing again. Do we want to encourage that sort of moral hazard? I don't think so. As my mom would tell me, though, the burned hand learns best.

I'm certain that there are a bunch of folks a-wishin' and a-hopin' for the deal to go through soon. And sure, it's terrible if someone's forced to go into foreclosure because they can't afford the home they bought. But the fact is, many people bought homes they had no business buying. Bailing them out is a temporary fix that does nothing to prevent it from recurring.

Sure, we're supposed to be charitable during the holidays. But charity can take many forms. Ensuring that Americans understand why this crisis happened, so that we don't have to live through it again, may be the best gift for future homebuyers. 


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  • Report this Comment On January 15, 2014, at 2:00 PM, VickyFord wrote:

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Rich Duprey
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Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.

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