Mortgage Rate Freeze Reached:

Reacting to the perceived threat of resetting adjustable rate mortgages (ARM), the Bush administration, under the direction of Treasury Secretary Henry Paulson, has created a plan to freeze interest rates on subprime loans for five years. Exact details of the plan are scarce, but the hope is that some extra time will give borrowers a chance to make payments:


Rate freezes have received criticism from democrats who contend the plan does not go far enough. Senator Hillary Clinton spelled out the details of her subprime bailout plan Wednesday, calling for a 90-day moratorium on foreclosures and a five-year freeze on the interest rates of adjustable rate mortgages. The plan has also been criticized as not being broad enough to cover the many home owners facing the threat of default.

From the other side, investors in mortgage backed securities, whom would ultimately realize lower returns on their investment, might threaten legal action:

SFGATE

Questions for Debate:
1. Is the Bush plan to freeze rates legal?

2. Who benefits from the rate freeze?

3.Will this have a positive, negative or neutral effect on the economy?

Questions for Debate:
1. Is the Bush plan to freeze rates legal?

2. Who benefits from the rate freeze?

3.Will this have a positive, negative or neutral effect on the economy?

This whole situation is a mess. Damned if you do, damned if you don't. On the one hand, we need to help secure our economic future as a nation. This is where the "General Welfare" part of the preamble of the constitution comes into play. Our government has a responsibility to ensure the general welfare of our nation for our posterity.

On the other hand, now government is expanding it's powers to force businesses into a practice without option. Also, some would say that those that are in trouble, are only in trouble because they bit off more than they could chew and it serves them right. As harsh as that sounds, there is some validity to it, but do we need to let it happen?

On top of it all, even if the government doesn't spend any tax dollars on this plan at all, it is going to cost hundreds of millions of tax dollars if litigation begins.

Damned if you do, damned if you don't.

1. Is the Bush plan to freeze rates legal?

I'm not sure, though I think so.

2. Who benefits from the rate freeze?

Everyone. Even the money lenders. They benefit more by keeping the payments coming in at the current rate than they would if their debtors can't pay and have to forclose. Then, as the value of those properties (that the lenders would now own) spirals downward, they take the value of everyone else's property downward with them, that includes the people who weren't foolish with their money. When you owe the bank more after several years' payments, than your house is worth, that's bad. If thousands of people are in this position, as they are now, that's very very bad. Better to freeze the rates than crash the housing bubble in one gigantic, catastrophic plop. Better for everyone who owns a single US dollar...the more US dollars, the better this is for you. So in this case, a freeze on rates is ultimately much much better for those lenders, as they have more dollars than most of us. Banks don't 'win' in depressions/recessions. Their investments are impacted too.

Is Bush's plan legal? What makes you think it's illegal? I mean the real question is should he be mucking around with that?

Who doesn't benefit?

Ultimately we have a lot of scary signs. Dollar weakening. Oil rising. Hard currency, commodities (Gold) soaring in price (meaning wealthy people see what's coming.) Add to that a real estate bust. Not a leveling, not an adjustment - a bust. (Can't wait to buy stupid people's houses myself... Still like that Hummer you bought refinancing your house when you should have been improving it?) All Bush is likely to do is forestall the economic adjustment (remember real estate gains barely account for 1% of the GDP) to the next President.

Basically the economy is a "living thing" and it does what it does regardless of what kind of President you have. However, a President that does NOTHING is always best for an economy - so Bush's mucking about can at best do nothing important and at worse make it a little worse that it would have been.

1. Is the Bush plan to freeze rates legal?

I can not see how this is legal. Two parties reach agree to a transaction. Later, a third party is coming in and changing the transaction without agreement from the original two parties. This sounds downright scary to me.

It should also be unconstitutional as such transactions are not interstate commerce.

2. Who benefits from the rate freeze?

If there are benefits to both sides of the transactions to amend their agreement then it is logical to expect those to parties to get together to do so on their own. Government intervention is not needed to make people do what is in their own best interest. It is imprudent to have government as a third party demand people modify agreements to please those not involved in a transaction. Transactions in a free country would be those where those involved in a transactions are doing so by their own choice. Action as proposed are a step towards loss of freedom in our country and towards baby-sitter socialism where government knows best and decision making is taken away from its citizens.

So what price would you place on that "stupid person's" house that would make it a good deal for you? If you live in a neighborhood that sold last year in the 500K price range, and you paid 500K for your house (borrowing most from the bank) and several of your neighbors now have to foreclose and the bank can only get about 300K on the market for them, what will that do for the value of your home? Is it really a 'good deal' for you to be able to buy that house so cheaply? Only if you currently own no property....Now, yes, you're correct if this were an isolated phenomenon for a few home owners. That wouldn't collapse the entire real estate market. But that isn't the case here.

1. Is the Bush plan to freeze rates legal?

This is a tricky one. It probably is for loans that had the involvement of a banking institution that's within the Federal reserve system even if the loan has since been bundled and sold to other investors. I'm sure the Treasury Department lawyers are being very careful in crafting any legislation that might be necessary.


2. Who benefits from the rate freeze?

I think pretty much everyone in the long term. In the short term though it probably hurts homeowners looking to sell (like me). Freezing these rates is going to eliminate a lot of potential buyers from qualifying for home loans which I think is going to further depress the market. I'm already reading about hits on housing prices as high as 35% in some areas. In my case here in Southern California, I don't think it will be quite that bad, but we're definitely going to take a hit on the selling price.


3.Will this have a positive, negative or neutral effect on the economy?

I think it will be generally positive by allowing things to kind of settle down a bit. It's kind of a "time out" for the housing market which has been absolutely crazy in the past few years.


Aquilla

Look at this way.

A house in a suburban part of NY is going for 600,000 last Summer. We all know the house is worth maybe 250,000 in the "real world"... Johnny Gratification bought the house 2 Summer's ago at 320,000USD and has since refi'd it to 600,000 to buy cars and trips and iPods - now he can't sell it for less than 650,000 but the most anyone will list it for is 450,000 - so he has to foreclose and I scoop it up at 300,000 and sit on it - maybe rent it. The market will go back up. Real estate always has. Worse case scenario is I sell myself for 450,000 - best case is the market swings agains I sell it for 800,000.

Thank you Mr Haveitallnow.

So I don't care what else happens in the neighborhood. I'm insulated if I can wait it out. I can. It's not like I'm buying a house in Lincoln, Nebraska that might never ever sell.

Is the Bush plan to freeze rates legal?
I'm going to guess legal if you think 3rd party intervention is right, illegal if you believe 3rd party intervention is wrong. I don't know enough about federal law in this area to say outright.

Who benefits from the rate freeze?
That depends on how events would unfold without the freeze and we might never know. Investors were expected/promised to get so much profit for holding these adjustable rate bank notes. The future as it was supposed to occur has been preempted. If banks were able to squeeze more money out of home owners for a year or longer without an increase in foreclosures investors might win. If home owners weren't able to cough up the dough, they "get away with it".

I think the freeze will staunch the flow for a little bit. That's typical of the way we've been dealing with the economy for years now. It's a heroin addict for credit and we've prescribed shots once in a while to keep it going. But the dollar is weak and foreign holders are done buying U.S. securities.

It's very hard to qualify for this freeze. I don't remember the exact number, but I heard on CNN some estimates are as low as 300,000 home owners. If the bubble is as big as the news suggests this estimate is a few million home owners short.

I think there's more to this offer than helping out people who really deserve it. This move has to be related to Congress's last bankruptcy reform law making it harder for people to file for bankruptcy and easier for businesses to file for bankruptcy. Decreased eligibility for personal bankruptcy means a precipitous rise in foreclosures and I think this means, ultimately, Bush is on the side of financial institutions. Putting off trickle down depression, I guess.

I don't feel sorry for buyers who played the housing market bubble for gain and lost, hopping from house to house and waiting just six months for the value of their property to skyrocket to make a few thousand dollars. I do feel sorry for buyers who were victims of predatory lending practices, however, and the freeze doesn't address this at all.

1. Is the Bush plan to freeze rates legal?

I doubt it. Furthermore, it doesnt sound very capitalistic to me.

2. Who benefits from the rate freeze?


The benefit are short term. The negatives are long term. (Explain below)

3.Will this have a positive, negative or neutral effect on the economy?

Negative. Why do we the taxpayers have to subsidize the poor decisions of big banks? First their bad decisions affect investments in other markets and now we the taxpayer will be making the difference for them. Furthermore, this sets a terrible precedent. The high risk hedge funds set up to support the subprime mortgages should be allowed to fail. If the government plans on bailing people out whenever those high risk investments fall through, then the investors will just take more hazardous risks. Its similar to how our bailing out of Mexico sparked the Asian Contagion in the late 90s.

I don't think there's any taxpayer money involved in this. The government isn't "baling out" hedge funds that I'm aware of.


Aquilla

Sorry, I missed this before....

Aren't mortgages, along with most other (legitimate) investment agents, FDIC insured? If so, this isn't simply a matter of two parties agreeing to a transaction, but a third party (the federal government) is also involved in the transaction.

Mortgage companies were warned back in October.

If the government was involved in the original agreement they were not a third party but one of the original parties making the agreement. If this were the case, I can not see it being legal for any of the parties in the original transaction crying 'uncle' and unilaterally changing the original agreement. Whether the government has come in after the fact as a third party to change the agreement or if they are now saying, "I made a mistake with our agreement. The agreement is now changed." in either case, it is illegal.

Well, if it is necessary to be FDIC insured to do financial business, and the federal government says: "We won't further insure you unless you do X,Y, or Z"...is that legal?

Personally, I wouldn't place my money with any financial agency that wasn't government insured. But that insurance comes with a price (doing things the fed's way) I'm sure.

I think it is a fine that the government, or anyone else for that matter, to have conditions in order to do business. That still does not mean that they can come in after the fact and compel agreements be changed. If this plan was a request by the FDIC to modify these transactions and not a demand, then I was under the wrong impression.

BA- I am sure there may be lot's of "johnyhavitnows" out there- but overall, I think it is pure fecal material. It's as bad as the bankruptcy laws being changed due to "them wanting to buy hummers and vacations in bora bora on credit cards"- when that was a pure lie- at the time, I believe over 70% of all bankruptcies came about because of medical bills. Medical bills that everyone on this board, pooling everything they had together, might now be able to pay.

Same with ARM homes.

One of the most important of needs is shelter. In many parts of the country- rent is nearly the same price as buying. Here, my house rents for 1800 a month, minimum, usually closer to 2500 a month (most likely that number, as it has a detached garage)- a three bedroom apartment averages around 1400 a month, a 1 bedroom, a nice one, is 850 a month- about the "floor" in our market. You occasionally see a fleabag around 650. Get what you pay for and all that.

My mortgage is 1800 a month. It is actually good financial sense to buy- you have equity when you move, hopefully -

I had a divorce a couple years ago, and had to refinance to keep my home off the market, and keep a home for my kids. Had to do an ARM, because of the loss of income, yadda yadda.

It is apartment dwellers and such you USUALLY see with big ticket items bought on time. Simply because they have the correct debt/income ratio. You own a home- your debt to income ratio gets hammered, typically because it is considered okay to go to 3/4 of your income to buy a house.

So lets just say, I am not demonizing those that are hurting now, it is not really thier fault either, for the most part. Just one of those financial ups and downs.

NOW- on to the BUSH BASHING time

I am on record as being able to say "I told you so" - GWs crazy spending and borrowing has set the perfect stage for a depression, and a massive foreclosure rate will hurt everybody BA- even you. In fact, you could just as easily end up in the soup line yourself, if you are not a producer of some kind of neccesary durable goods.

for instance, you may be okay if you make a "how to be homeless" kit for the newly homeless

If you have nearly no debt, easily paid off, lots of "liquid assets" (money stuffed in a matress) you may do very well in a depression that this could spiral into- but otherwise- unless you are making soup kitchen ladles, you may very well be a loser too- especially since tech for the masses will go away, fast.

This very well may be the first indicator- families losing the farms is what was one of the first signs of the last major world wide depression-

curious though- how many homes do YOU think will be foreclosed on until it spirals out of control?

I know some mortgage brokers that think that if around 25% of ARM mortgages fail, it will have national and probably global ramifications, spinning the entire thing out of control.

I seriously think the best thing to do here, and it pains me to no end as a libertarian, is to allow a goverment plan to re-finance at a set interest rate for a 30 year fixed, or rather, goverment garunteed loans, to current homeowners only, so that banks can safely re-fi these loans to stabilize the market.

If the homeowner has an ARM, and has lived in the home or up to four plex since it was purchased, they would be eligible.

You can put some conditions on it as well, like non-medical credit card debt, no car loans that is more than 1/4 of the value of the house etc- to stop those "haveitnow" types from profiting on this. If you have a 100k viper, and a 300k house- you would not be eligible until you sell the house. You will have to refinance to cover your credit card debt, if it is over a set number- say 20k sounds reasonable- and non-medical related- and you will be barred from further credit cards of more than 10k by law, or you will be considered in default as well.

It is a catch-22 for alot of homeowners, that life circumstances dictated thier financial landscape, not through irresponsibility,l that we should try to very specifically target for some sort of goverment re-fi.

Then, we need to scrutinize the mortgage lending market again, and cut out some of the very shady dealings.

For instance- it is illegal in the state of Alaska to have a penalty for early payoff- so groups like Lending tree charter outside of Alaska and don't tell thier customers this when signing.

Luckily, our senators are starting to get p0-d over this, and are passing laws making groups like lending tree pay four times the loan worth for non-disclosure as well. personally, I think drawing and quartering is too good for them.

I read a little more and I think sub prime rates are the tip of the iceberg. It's not just market players that're screwed because of (I think) banking deregulations and/or run arounds. A journo for MarketWatch posted an email from a "20-year veteran of the mortgage industry". Here's a snippet:

Since 2003, when lending first started becoming extremely lax, a small percentage of the loans were true sub-prime fixed or arms. But sub-prime is what is being focused upon to draw attention away from the fact the lenders and Wall Street banks made all loans too easy to attain for everyone. They can explain away the reason sub-prime loans are imploding due to the weakness of the borrower.

How will they explain foreclosures in wealthy cities across the nation involving borrowers with 750 scores when their loan adjusts higher or terms change overnight because they reached their maximum negative potential on a neg-am Pay Option ARM for instance?

Sub-prime aren't the only kind of loans imploding. Second mortgages, hybrid intermediate-term ARMS, and the soon-to-be infamous Pay Option ARM are also feeling substantial pressure. The latter three loan types mostly were considered 'prime' so they are being overlooked, but will haunt the financial markets for years to come. Versions of these loans were made available to sub-prime borrowers of course, but the vast majority were considered 'prime' or Alt-A. The caveat is that the differentiation between Prime and ALT-A got smaller and smaller over the years until finally in late 2005/2006 there was virtually no difference in program type or rate.

The Government says they are going to use the credit score as one of the determining factors. But we have learned over the past year that credit scores are not a good predictor of future ability to repay. This is because over the past five years you could refi your way into a great score. Every time you were going broke and did not have money to pay bills, you pulled cash out of your home by refinancing your first mortgage or upping your second. You pay all your bills, buy some new clothes, take a vacation and your score goes up!

I found this email post through a blog, The Agonist (I know, I know, a blog), and asked one of the regulars to comment. I recommend reading Numerian's response. I like the fact that he bothers explaining financial processes to the uninitiated. Daniel Gross also warns sub primes are the beginning of a larger problem but he doesn't go into detail and leaves a lot up to readers to figure out.

Part of the larger problem is that the debt was divided and then repackaged into other sectors of the economy. This was meant to divy up the risk but ended up extending the reach of the subprime mess. Now there are at least two problems which are feeding off each other.

The first problem is the liquidity problem where countries are dumping dollar holdings and looking for tangibles - commodities or commodity driven currencies. As a result there is a growing reluctance to take on new debt in American dollars. The result is similar to a run on a bank where everyone withdraws their money at the same time and as a result the bank cannot service everyone at once because their reserves are inadequate. What banks are required to do at this time is print excessive amount of cash to bail each other out and provide liquidity to the people who have lost faith in the system. Problem one - an internal banking crisis.

The new liquidity is popping up everywhere. From coffee, to lead, to food, there is plenty of new money. The problem is now the debt has been monetized - it has evolved from mere treasury notes and has been converted into cash. Wall street tries very hard to prevent this from happening, and normally they succceed. This debt based money is now mingling down into more basic staples. Any sector that is weak to begin with (subprime debt holders) are going to see movement first. To correl these panicked people rates normally go to encourage people to hold onto the debt so the debt does not migrate from notes to bills. The higher interest rate is the leverage the fed uses to convince people.

The second problem facing us is there is too much debt in the system so rates can't go up. To do so will bring down much of the economy. This is the true purpose of the rate freeze. To hold back the tide of bad investments from pulling down the economy for another day. This is a stopgap measure because the banks are too busy and too reluctant to provide yet more new money into the system which will buffer prices further. A good definition would be inflation stressing a weak market from a loss of currency status.

2. Who benefits from the rate freeze?


Property values have been artificial inflated because of the credit market. Properties are not worth what people have been "paying" for them. How will freezing the rates (for some 300,000 borrowers) solve this problem?


A rate freeze will not prevent a housing bubble crash. While a rate freeze will reduce the number of foreclosures, it will not change the fact that property values will return to more realistic numbers, that is, drop by 25-30%. Our debt-fueled consumer economy will take a hit no matter what we do.

When the rates are scheduled to reset, the monthly mortgage payments for those homeowners will go up substantially. If they can't pay, what will happen? They'll have to sell their homes, which are worth less now in many cases, than they paid for them. They will go into debt and that much dumped real estate at one time will depreciate the market further. It will have a cascading effect. The houses of all home owners will depreciate as well. The economy will be drastically affected. Freezing rates will enable people to afford to stay in their homes for a few more years, the housing market might have a chance to stabilize during that time and we'll avoid such a dire effect on the market all at once.

Even if the rates are frozen, the borrowers will be moving from teaser rates -- which are interest-only or below interest-only -- to regular rates (principal+interest). The subprime borrowers we're talking about will have trouble with regular rate payments no matter what the interest rate is set at because the principal is now involved.


These aren't "their homes". These homes are owned by the loan holders. These people are essentially paying rent to the loan holders.


They are already in debt. They have penned their name to an asset that's worth less than what they paid for it. The market will reflect this debt whether or not the property is sold.


The houses of all other owners will depreciate no matter what. It doesn't matter if the houses are put on the market or not.

It doesn't matter? The laws of supply and demand don't exist in the real estate market?

Real estate is an asset. It's valuation is based on what the market perceives its value to be. There are many mechanisms the market may use to assess value of a product. One mechanism is to sell it but it is only one mechanism. For real estate, there are property value estimates which are the primary means to assess a property's value. These estimates are used by a host of financial services as well as by the government for tax purposes.

Forgive me if I'm being dense, but I have to ask...how exactly do they come up with these property value estimates? I must assume that the government comes up with these numbers by estimating the market value of that real estate. A number based on supply and demand...IOW, what the market will bring for that property. How else would they place a number on it?

There are very few people who own their homes entirely. This is one investment that everyone is leveraged out on. A total crash in this market will have severe consequences. Measures to slow that down are a good thing.

Here's a good wikipedia link: real estate appraisal:
A market-based appraisal is not solely based on supply and demand. The terms of sale component is a very important element. An unsecured credit market will artificially inflate the perceived value in the terms of sale component.


There won't be a total crash in this market. Property will just devalue to a more realistic price. Changing the terms of loans will not slow down this devaluation. It will just slow-down the rate of foreclosure.

Mrs P- well, actually- the appraisal and mortgage/lender kinda work hand in glove, and it is not really completely market driven- though, it is certainly a very, very big component.

You want 200k for your house. Someone wants to buy your house. A mortgage lender wants to lend money- so the appraisor, almost magically decides it is worth- viola'- 200k. Only if it is an insane amount, the mortgage lender and everyone will put on the brakes- but really, it is kind of an odd deal.

Logo- I think you underestimate the precipice we are all standing on here- I think it will hit, and hit very, very hard, and so does most of the nation- that alone- the perception, is enough to start a cascade effect as well.

I wouldn't believe it myself had I not seen it myself, and seen how hard it is to pull yourself (as a state) out of that hole- took a very rich state nearly 4 years to recover.

All it takes is a "perfect storm" and you can have a global economic catastrophe.

1) you have massive investment of american treasury notes by china
2) massive deficit spending like this country has never seen in it's entire history
3) whole regions of the country, where there is good employment, haveing heavily over-valued homes
4) the entire issue with mortgage lenders themselves, as we have discussed here.

Okay- lets say- oh, some really hot real estate market with a good employment base- and the arm rates reset, i this region, that causes 50% of the homeowners to lose thier homes-

what happens is cascading from there- poeple lose or leave jobs, because they can no longer afford to live close enough or commute anyway, and businesses that used to cater to those homeowners go under, which means more foreclosures, causing possible whole industries to collapse, and so on.

There is a reason that folks on both sides of the aisle are pretty scared here- it is because we are pretty close to that precipice.

The premise everyone is taking is that housing is not overpriced and that the market sluggishness is just a short-lived fluke. Since investors make up a substantial portion of this market, and the bailout does not benefit them, I would wonder if the bailout really would do much at all in the long run. Historically, investor ownership of residential real estate is at an all time high, over 3-4 times what it was just 20 years ago.

I agree. Housing is overpriced due to the credit market. Let's looks at it this way.

1. A property owner wishes to sell their property asking for $X
2. Potential buyers overbid offering $X + $Y.
3. Why can they offer $Y over the asking price? Because they *all* qualify for huge loans. It's like "free" money.
4. The next property owner asks $X+$Y.
5. Potential buyers overbid offering $X+$Y+$Z
6. And so on...

The issue is that properties were not being valued at their market worth but instead being valued based on how easy it was to get a huge loan. Everyone was playing that game.

Now that loans are harder to get and will return to more traditional "security"-backed guarantees, we are seeing the values of properties drop. Obviously demand has dropped too but this is a secondary effect. The main change in this market is that you can't get "free" money anymore. The market "bubble" pops...

I would support helping directly some of the home owners who show that they can really pay the mortgages going forward with limited help.

To bail out the financial groups who loaned people with no credit, or worse very bad credit, would be to invite this to happen again.

I do not get it. The ARMs were a bad deal. Why ? Because the jump in rates is difficult for many to handle. By postponing this jump have we eliminated the jump? Heck no. So, what it the point. It seems to me the point is to delay the inevitable. This delay may be important for political reason for the upcoming elections. Why should anyone else like it? I suppose those who are getting cheap rent for the time being (in the form of the temporary low payments) like it some. All of this extension plan is delaying the correction in the market of overpriced real estate.

Delaying the market correction is a bad deal for all of us. It creates uncertainty. It props up an out of whack real estate market. It will contribute to stagnation of the economy over a longer period of time.

Frankly, if I had a bad ARM, it would be to my benefit to default on an overpriced mortgage early in its life and then get a new mortgage with a corrected value of a similar property. It is bad idea to continue putting good money into a bad deal.

Well said. Whether or not the rates are fixed, property *will* go down in value. So, while extending ARM teasers may reduce the rate of foreclosures, it will not address the fundamental problem. People have used their property as leverage for other debt and/or investments. Since the value of the property has dropped/will drop, these other debts (or investments) are essentially secured with nothing. Actually, that's not completely true; these other debts/investments are really secured by the holder of the loan. That's the consumer side of the story...

I know I addressed this in an earlier post but I'd like to state my position on the notion of "supply and demand" in the context of the housing market in a different way.

First, I'll enumerate some of the factors that make housing different from other types of purchases.

1. No one (or almost no one) buys a house with cash; they almost always get a loan.
2. Housing loans are *huge* and mature well into the future unlike almost every other loan.
3. Housing loans are supposed to be "personal" loans secured by borrower and the market (present and future) value of the property.
4. There are tax benefits associated with primary residency: loans and reselling.
5. Historically housing over the long term goes up in value well in excess of the rate of inflation: most other large consumer purchases go down in value -- cars, computers, etc.

This makes housing very different from other types of market purchases.

People *want* to buy housing. I mean, they really, really want it; however, housing is *expensive*. So, they try to get a loan. When they don't get the loan, they don't buy the house. Or they try to find a house in a market they can afford. At least, that's the way it used to work.

Second, the theory of supply and demand is often naively applied to the housing market. What do I mean by "naively applied"? When dealing with a pure market transactions, that is, there are no mediating forces (discussed later), the equilibrium price curve is an excellent model. Another way of putting this is that there are no hidden variables for such transactions.

Housing on the other hand is not a typical consumer transaction. Like I mentioned earlier, housing is almost always purchased using a loan (the mediating force). And consumers want to buy property (sometimes unreasonably so). If it's easy to get a loan, then the demand for housing goes up. If *everyone* can easily get a loan, then there will be a bidding war (in aggregate) for the housing. This will increase the price for property. It doesn't necessarily increase its value, though.

Third, everyone easily getting a loan is ultimately the problem. At some point, loans moved from being mostly "personal" loans to mostly "leveraged" loans. That is, the primary factor for giving a loan changed from using the borrower's current holdings and income to using the current/future market value of the to-be-purchased property itself. In the corporate world, this is known as a "leveraged buyout". I can't afford to buy the company outright; so instead I'll ask for a loan to purchase the company; this loan is "secured" by the yet-to-be-purchased company itself. Sound familiar?

What does this all mean? People getting "free money" secured mostly by the asset valuation itself is a recipe for a market run amok. Once the money supply (i.e. loans) dries up, the true value of property will be reflected. While housing *will* decrease in value because of decreased demand, this demand was allowed to surface because of the ease at which it was funded. A normal market (read: rational market) would not have gotten this far in the first place because there would have been little unsecured credit.

So, back to the debate at hand...

Fixing loan rates will not change the macroeconomics of the housing market at all. Housing values will go down *because* no one is giving away money anymore (i.e. loaning money). A significant percentage of the US economy is wrapped up in this housing market. That percentage will necessarily decrease but at the cost of recession.

So, again I say, if the goal is to reduce the rate of foreclosures, then fixing rates will help somewhat. It will not help stave of the popping of this housing bubble.

Ummmm yes. The government should be like your parents. It doesn't swoop in and save your butt unless you get tossed in the county jail or you wrap the family car around a tree. Only when the stuffing hits the fan, should the government intervene. Ladies and gentlemen, the stuffing has hit the fan.



I love issues like this, because they are a bit arcane and you have to dig deep to get to the bottom of the matter. I use to be for the "stick it to the investor!" and "let the market shake out!" school of thought, then I found material like this: Bolded portions are my doing:



The third question is a good one-the proposed efforts have had no effect on the economy, I guess that means it's bad. The effort at freezing the rates has obviously failed to work, as the White House is now sending out a trail balloon about further changes to attempt to remedy the problem. A leading economist whose terms Greenspan makes famous, is now suggesting that we will meet a Japanese style recession.