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Monday, December 03, 2007
The Subprime Trap?
Most financial papers I read seem to be preoccupied with what they like to call a subprime mortgage mess. Now, I couldn't agree more that loaning huge amounts of money to less than creditworthy individuals was probably not a good idea. But the more I think about a possible government bailout, the more I question where personal responsibility has gone.
Why should the taxpayer subsidize poor decisions by both lending institutions and by individuals? Answer: they shouldn't. It is not the place of the .gov to intervene in a crisis that really isn't yet a crisis.
What should happen is that lenders should solicit those who have been faithful with their payments for the original terms of the loan, and then offer them a comparable fixed rate, with some sort of incremental increase tied to the prime, along with maybe a nominal processing fee. I'm unclear as to how the lender can be compelled to do so, other than a common sense approach ("Gee, maybe if we renegotiate this borrower's rate, the home won't go into foreclosure, and we won't lose money on this deal.") Heck, maybe an enterprising lender can open a whole new business catering to people who want to transition from an ARM to a fixed rate that is comparable to what they're already paying. It would seem to be good business to loan to those who have already proven their worth, wouldn't it?
Now, if a borrower can't make the $800 payment on a 5.35% 5 year ARM that is about to go up to 7.35%, maybe foreclosure is the best option. But I really think some semblance of reason should prevail for those who are keeping up with their obligations.
Just my $0.02.
MORE: From today's WSJ Afternoon Report - "Treasury Secretary Henry Paulson offered some clues today in a speech to the Office of Thrift Supervision's housing forum. "First, we are increasing efforts to reach able homeowners who are struggling with their mortgages. Second, we are working to increase the availability of affordable mortgage solutions for these borrowers. Third, we are leading the industry to develop a systematic means of efficiently moving able homeowners into sustainable mortgages," Mr. Paulson said, outlining the goals of the plan. He also broke down four categories of subprime borrowers. The first and second groups are, respectively, those who can afford the adjusted rate and those who can't afford their lower starter rates. These borrowers shouldn't expect to be included in the plan, Mr. Paulson said. The third group represents homeowners who might be able to refinance their mortgages, while the fourth are borrowers "with steady incomes and relatively clean payment histories who could afford the lower introductory mortgage rate but cannot afford the higher adjusted rate." The final group is the focus of the government-backed plan.
That all sounds well and good on the surface, but here's the rub. Who determines who falls into what group? What criteria is going to be used? How can someone prove that they belong in the group that is going to be the focus of the government-backed plan? Platitudes are worth nothing. I would like to see the details on this proposal.
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