Outside editorial: Bush plan's a teaser freezer

Posted: Monday, December 10, 2007

The following editorial first appeared in the Chicago Tribune:

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President Bush unveiled his plan Thursday to help hundreds of thousands of homeowners whose subprime mortgages are due to reset at higher interest rates over the next two years. The rescue plan comes against a backdrop of plummeting home sales, soaring foreclosures, tightening credit and growing political pressure to do something.

The administration's something would freeze for five years so-called "teaser" rates on subprime mortgages issued from Jan. 1, 2005 until July 31, 2007. Subprime mortgages generally were taken out by borrowers whose spotty credit records prevented them from qualifying for conventional fixed rate mortgages at lower rates. Subprime teaser rates were in the 7 percent to 8 percent range and are due to reset to as high as 11 percent over the next two years. That would add hundreds of dollars to borrowers' monthly mortgage payments, potentially leading to many more foreclosures.

Only those who are current on their mortgage payments, who live in the homes at risk and who can show they couldn't afford the higher payments would be eligible for the freeze. That rules out thousands of homeowners who are still at risk of foreclosure.

Bush's teaser freeze drew quick fire. Democrats complained it doesn't help enough distressed homeowners, and Republicans objected to any government tinkering in the contractual relationship between borrower and lender.

Banks, mortgage servicing companies and investors in real estate are free to renegotiate subprime loans now. They have incentives to work out alternative terms that borrowers can meet, and many of them are doing so. So, it's unclear how much impact this program would have beyond what the market will do itself.

The risk is that any government plan to manage this problem will skew the lending markets. The higher rates on subprime mortgages - both teaser starter rates and resets - reflect the higher risk of lending to those with poor credit histories. The government would be putting its imprimatur on an interest-rate freeze. That means investors who bought bundles of these mortgages will earn less of a return, so investors may think twice before investing in U.S. real estate in the future. That's likely to put more upward pressure on interest rates, which is going to make buying a home more expensive.

Leaders in Congress, though, are likely to press for even greater government intrusion in the lending markets. Winston Churchill once described democracy as the worst form of government - except for all the others. That best describes the Bush plan to rescue the subprime lending mess.

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