Thursday, December 6, 2007

The interest rate freeze

I saw that Bush negotiated an interest rate freeze yesterday and sat down to research it so I could rant about it. It ends up, though, that based on the available information it looks like a pretty decent solution.

The proposal first off only addresses subprime loans. That means I could not have gone out and refied my house a year ago into a crazy 3% teaser rate ARM that was going to cause me to lose my shirt in 2 years and come out way ahead of where I am now. Somebody with my credit can't use this. We're talking about people who got into a crazy 11% loan that jumped to 15% after the end of the fixed period.

It secondly doesn't even try to address people who can't afford their homes even at the introductory rate (which is probably a good portion of the subprime market). So if you got yourself into a house you couldn't afford at 11% the government isn't going to pay for you to keep your house or twist somebody's arm get them to give you a 6% loan.

The people who own securitized subprime loans were about to have huge drops from foreclosures if the government didn't bail them out so something had to happen or people would lose their houses and the securities they owed would lose a bunch of value as well. The mortgage owners (banks and traders) ended up losing some interest on a really lucrative (but really risky) security by freezing the rates, but they were going to lose a good portion of that anyway to foreclosures (and they still might). I do feel a little bad for people who own a lot of these securities (cough, CountryWide) because it's an insane risk that is only worth taking because of the incredible return on it and this deal lessens the return while keeping a lot of the risk. I would rather the government not have to use its, um, influence, to get them to agree to terms. Maybe their actuaries say the risk vs. return numbers come out best with a two year freeze, for instance. Having said that giving people who you know can't manage money a ripoff loan that has rates going into the stratosphere in 2 years makes you a financial pusher, so I'm not getting teary eyed about them losing some of their return.

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