Dean Baker: Bubble trouble

from the Guardian UK:



Bubble trouble
President Bush's plan to assist moderate-income homeowners fails to recognise the seriousness of the US housing crash
Dean Baker

December 10, 2007 8:00 PM | Printable version

President Bush is making slow progress in addressing the problems created by the collapse of the housing bubble. His proposal to freeze the interest rate on subprime adjustable rate mortgages (ARMs) at the relatively low "teaser" rate can help hundreds of thousands of moderate-income homeowners. However, the measure will not provide any assistance to most of the moderate-income homeowners in need of assistance. The limited nature of the proposal suggests that President Bush and his advisors still do not recognise the seriousness of the housing crash.

The list of people left out in the teaser freezer plan is long. First it does nothing to help homeowners whose mortgage had already reset to a higher rate. It only affects resets scheduled for after January 1 2008. It does nothing to help people who took out subprime fixed rate mortgages, many of whom also now find that they can't meet the expenses of homeownership. Predatory lenders who were dishonest in pushing ARMs were no more honest in explaining the costs of homeownership to buyers who insisted on fixed rate mortgages.

The Bush plan also only applies to people who had subprime mortgages. This means that a family living across the street from a subprime mortgage holder, with an identical income, who had always paid all their bills, and therefore qualified for a prime mortgage, would get no benefit from the Bush plan. It is important to recognise that prime mortgage holders are struggling also. The default rate on prime ARMs has more than tripled over the last three years. It seems peculiar to penalise people who have good credit ratings.

In the same vein, if a subprime mortgage holder's credit rating has improved so that they now qualify for a prime loan, they are also excluded from the Bush plan. While in principle these people can arrange a new loan at a lower interest rate, this will not circumvent prepayment penalties in many contracts. More importantly, in the many areas where house prices have fallen, homeowners will not be able to get a new loan since their homes are now worth less than their mortgages. .....(more)

The complete piece is at: http://commentisfree.guardian.co.uk/dean_baker/2007/12/bubble_trouble.html

Anything that actually helps a home buyer in trouble is merely incidental. The Bush proposal, lame as it is, also scuttles any other, serious proposals, such as Barney Frank's, by sucking all the oxygen out of the issue.