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Thursday, December 6, 2007


I am not a big "personal responsibility" libertarian kind of guy, but when I see that we're going to start forcing lenders to freeze rates on adjustable rate mortgages, it gets my back up. I'd like somebody to order my lender to knock my mortgage interest rate back a couple of points, too. Where do I go to sign up for that?

Some -- repeat, some -- subprime borrowers were defrauded into signing up for their high-risk mortgages with "teaser" rates. But I'll bet most of them weren't. I'll bet most of them knew exactly what they were signing, or didn't think it mattered what the contract said. The government's new message that you needn't understand or honor your own home mortgage terms is just another step in the dumbing down of this country beyond recognition.

On its face, the mortgage "relief" effort looks like federal intervention on behalf of the little guy, but I'd look deeper before I'd accept that characterization. If the lender dudes actually wrote off everything that they already know is uncollectible, their stocks would plunge (as they should), and some seven-figure executive year-end bonuses would get pared back quite a bit. When that kind of threat is on the horizon, you know that it's George Bush to the rescue, for sure.

But get used to this, America, because it's just the beginning. Just as the sane people who took out fixed-rate mortgages are now going to pay for those who screwed around with ARMs, the sane people who put money away privately for their old age will soon have their Social Security benefits cut, so that the fools who didn't put anything away get the same standard of living in their retirement. There are so many indignities that middle-class families suffer in the Bush-Clinton Empire (27 years and counting). I'd like to kick my grammar school civics teachers in the shins right about now.

Comments (16)

I wish there was a way to securitize my dish-washing duty. That way if forgot to do the dishes and my wife got mad at me, I could have the bankers whine to the Treasury for help.

My first reaction when I heard this is that it protects larger banks that have significant subprime defaults looming in the future as a result of upcoming scheduled rate hikes, at the expense of smaller banks that didn't play such shennanigans with their borrowers. Now the debt of these smaller banks isn't worth as much on the books, even though they might not have the risk exposure of the large ones.

I am not a big "personal responsibility" libertarian kind of guy

JK: Oregon Libertarian Party is at


Well said, Jack.

It may frighten you to know that Mr. Tee agrees with you 100%.

I refinanced my 5% "teaser" (7 year fixed rate, with a balloon or ARM reset) a year prior to maturity. I got a 5.6% 30 year fixed rate. So I'm paying $234 more each month for the comfort of knowing I don't care what interest rates are a year from now. I also won't be impacted by more restrictive underwriting criteria or fluctuations in my home's value. And the associated refi charges aren't even deductible.

There are alot of house flippers who are going to be moving back into their (previously vacant) "owner occupied" condos now. That's the only way to lock in the introductory rates.

From what I have heard - and I'm by no means fully up-to-speed on the issue - it's a voluntary program for the lenders.* From this I infer two things. One, that the president's plan basically amounts to him asking the banks nicely to do what they can. And two, I kinda suspect that what the lenders will do is re-evaluate the risks and cherry-pick the best remaining risks for relief, and also extend a bunch of interest-only deals for a few years. (And I suspect some lenders would have done that anyway.)

I doubt the lenders are going to shoot more of their own toes off just because the Prez asks them to.

[*: There is also apparently an FHA component, which presumably is not voluntary for the FHA.]

Is it likely that the lenders were losing money by loaning it out at 5 percent? If they were making money at 5 percent, a "freeze" at that level can hardly be said to hurt them - except the profits won't be as high as they otherwise would be. It seems to me it's in the lenders best interests to keep people paying these mortgages with the housing market the way it is. If a lender suddenly has a few dozen houses in a given market dumped back to them, what's the likelihood they will recover their full outstanding loan amounts? Probably pretty low.

This scheme is one cynical, political band aid designed to keep the hampsters(American consumers) on the wheel(consumerism) without interruption. Since when is a contract not a contract? I'm not a big advocate of predatory lenders but there has to be some bedrock and some degree of personal responsibility for knowing what you are getting yourself into. This whole issue is an extension of what scares me about the average American citizen. Idiots like Bush get elected because the voting public refuses to engage in the slightest critical thought over what they are really buying into. These same folks are out signing mortgages without any regard to how they will afford the payment once the "introductory" rate increases. Last weekend I watched Mike Judge's flick "Idiocracy". At the check out counter the clerk said to me "This movie should be in the documentary section." He was right.

It seems to me it's in the lenders best interests to keep people paying these mortgages with the housing market the way it is.

True, but it does becomea PR problem when lenders selectively extend deals to only some of their customers, if that's the way this is going to work. Once word gets out, those who are not in any risk of default will start asking why they also can't be cut some kind of deal, as Jack's commentary alluded.

Having bought my first house four years ago, I think that a lot of mortgage brokers and banks engage in what can charitably be called "aggressive" salesmanship (less charitably: "predatory lending"). I had brokers trying to sell me interest-only loans with huge balloon payments after five years and banks trying to convince me that I qualified for much more than I knew I could afford. One broker actually told me I was "stupid" to look at 30-year fixed rates and pay 6% when I could take a 4% ARM and just refinance in a few years. Even though I knew what kind of loan I wanted and what I could afford, the marketing of "alternatives" was relentless -- and often dishonest.

So yeah, people should have the personal responsibility to fully understand their mortgages. But lenders should also have some regulations as to full disclosure of all terms. The free market solution to this problem is to let the banks eat the losses, but that also means hundreds of thousands will lose their homes -- which will harm the rest of us economically. If we can hit a middle ground where banks take some hits (and they already have taken billions in losses) and people are able to keep their homes, I think that's a decent outcome.

"[...] it does becomea PR problem when lenders selectively extend deals to only some of their customers"

The horrible beauty of the scheme is that the President's request gets the lenders off the PR hook for most purposes. ("Hey, we didn't decide to do this, the President told us to do it.") It's a dazzling bit of theater that is a PR win for almost everyone, while hardly making any actual changes at all.

I'm reminded of the grasshopper (or was it a cricket) who fiddled each day away while the squirrel was busily gathering nuts for the upcoming winter.

This is just an example of an old saying; "If you owe the bank $100 and can't pay you have a problem. If you owe the bank $100 million and can't pay, the bank has a problem."

That is exactly what happened here. There were a huge number of greedy folks who thought they could make some money by flipping houses or by leveraging their home equity. They got busted and usually they would have to go to the corner and where a dunce cap. But this time there were so many of the greedy pigs that it actually started to threaten the credit markets. So a timeout is called in the hopes that it will get back to normal. Moral of the story is that greedy pigs usually get slaughtered, except if there are just too many of them to deal with.

Everyone who's 401k got nailed by the .com bust and didn't get compensated by the gummint, raise their hands...

Check out this British parody about how subprime american ("dodgy debts") become structured investment vehicles.

Does anyone know what percentage of sub-prime is actually still held by the issuers? Seems to me that they dumped most of it after collecting the fees. That's what got us into the problem in the first place. Those who issued the junk no longer own it, so they never looked at the risk.


You don't have to be a libertarian to support the idea of personal responsibility. Actually, if you're simply a parent, you've probably made the "actions have consequences" speech to your kids about a hundred times. You make that speech because you know that if you let kids just blame everyone else for their problems, they're never going to grow up.

Unfortunately, politicians thrive by telling everyone just the opposite -- that it's never your fault and there's alwasy some tooth fairy who can pay for your mistakes. As long as voters continue to believe that, we'll just get more bail-outs, more trams, more streetcars, etc.

John Charles


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