The Veridian Blog

Today, President Bush unveiled a subprime bailout plan that will freeze interest rates for subprime borrowers for 5 years thereby avoiding further delinquencies and foreclosures.  The main provision of the plan is a 5-year freeze on the low teaser rates for subprime loans that were originated between January 1, 2005, and July 31, 2007, and which are due to reset to higher rates between January 1, 2008, and July 31, 2010.

On its surface, we do like the idea.  The plan seems like an effective way to stem an otherwise bloating inventory of houses and helps support home values.  Borrowers are now less likely to default and less likely to put their houses on the market.  But there are questions of fairness and economic impact that will linger for years before we discover the full-effect of such policy.

So here's my rant: Many subprime and unsophisticated borrowers are suddenly off the hook - some with teaser rates in the 1-2% range will continue to enjoy the low payments for another 5 years.  Is this fair?  What happened to financial responsiblity and accountability?  Borrowers who have good credit profiles are now stuck with higher interest payments than those borrowers with bad credit and have no bail out option.  Borrowers who had the foresight and financial know-how to refinance to a more stable program but who just happened to close escrow after July 31 now do not benefit from the plan and may in fact have just shot themselves in the feet by refinancing.  Finally, conservative borrowers who have been paying higher 30-year mortgage rates for the last 5 years are now stymied for playing it safe from the very beginning.

Lenders, who have already been hit hard, will now lose millions in profits that have already been accounted for and booked.  What will that do to consumer confidence, the quality of loan programs and interest rates? 

The President's plan is an admirable attempt at saving the housing sector and really goes to show that the problem is very serious.  But there's macro and micro issues that will eventually need to be addressed sooner or later.