By JLP | November 30, 2007
I’m skeptical that freezing subprime mortgage rates is the answer to our subprime mortgage mess.
But freezing mortgage rates is exactly what the government and financial institutions are about to do, according to this front page article ($) in today’s Wall Street Journal. Here’s some of the highlights from the article:
Details of the plan, which could be announced as early as next week, are still being worked out. In general, the government and the coalition have largely agreed to extend the lower introductory rate on home loans for certain borrowers who will have trouble making payments once their mortgages increase.
Many subprime loans carry a low “teaser” interest rate for the first two or three years, then reset to a higher rate for the remainder of the term, which is typically 30 years in total. In a typical case, the rate would rise to around 9.5% to 11% from 7% or 8%. That would boost an average borrower’s payment by several hundred dollars a month.
Who will be able to get “help?”
Treasury officials say financial institutions are likely to set criteria that divide subprime borrowers into three groups:
1. those who can continue to make their payments even if rates rise,
2. those who can’t afford their mortgages even if rates stay steady,
3. and those who could keep their homes if the maturity date of their mortgages were extended or the interest rates remained at the teaser rates.
Only the third group would be eligible for help.
I wonder how many borrowers are in the second group? Also, this “fix” seems to be temporary in that the teaser rates will only be left unchanged for up to 7 more years. What happens after that? Do we care? I think eventually we’re gonna face a reckoning. Until then, it’s on with the bandaid approach.