Recently, a “non-bail-out” program was announced by the federal government, put together with great care by the US Treasury Secretary and many major lenders.
One of the elements of the proposal would freeze the interest rates on many loans. (The program has not been approved or made law, btw, it’ll be another 90-days before any action is taken, from what I understand …)
The goal is to keep many homeowners from losing their homes to foreclosure.
But, to many people, allowing these homeowners (a misnomer, if there ever was one) to hold onto their homes will not help anyone, from them to their lenders to you and me (Mr & Mrs Taxpayer and Wage-earner).
From Thursday’s Times:
Whether or not their payment levels are frozen, borrowers with loans that are greater than the values of their homes will have few incentives to keep paying their mortgages or to maintain their properties.
Why spend more on a home in which they have no equity and which they may lose to foreclosure anyway?
Having put nothing down or having extracted equity in previous refinances, most subprime borrowers will lose nothing financially from foreclosure. In some cases the low teaser rates allowed them to pay less than what they might otherwise have paid in rent. The real losses are borne by the lenders.
That’s exactly what I think. These homeowners don’t have any incentive to hold onto their homes, not when they have the option of walking away. Yes, their credit will be shot, but, really, isn’t it, already? It’s not like they’re going to want to go out and buy, again … at least not right away.
But, actually, I think there’s something much more devious going on. And, clever.
You see, the Treasury chief and the lenders aren’t being altruistic.
You see, they don’t want to allow the homeowners to continue to make monthly payments – they want to require the homeowners to do so.
Because, if these homeowners don’t pay their loans, their houses will go into foreclosure, the banks will be stuck with depreciating assets, there will be an increase in an already bloated inventory of homes, etc., etc., etc.
Meanwhile, the government doesn’t want these homeowners to lose their homes, not because they care about them, but because if they do, the US economy will tank, creating instability, then war, famine, and pestilence, etc., etc., etc.
Offering a way out of losing their homes isn’t a “carrot”. It’s a stick.
Source: Frozen Rates, Falling Prices – By Peter Schiff, The New York Times