“U.S. Treasury Secretary Henry Paulson is negotiating an agreement with banks to stem a surge in foreclosures by fixing interest rates on loans to subprime borrowers, according to people familiar with a meeting he led yesterday.”
“While the government can’t force the industry to modify loans, Mr. Paulson and other administration officials have been using moral suasion to push for workouts, telling the companies it is in their interest to avoid foreclosure since most parties can lose money when that happens. A similar plan to freeze interest rates temporarily was recently announced by California Gov. Arnold Schwarzenegger and four major loan servicers, including Countrywide.
Among the holdouts have been investors, who typically hold securities backed by mortgages. If interest rates are frozen, they would lose the potential benefit of higher payments. But investors have cautiously moved toward cooperation, likely on the grounds that it’s better to get some interest than none at all.”
“Officials in Washington have been cautious about steps that would be seen as rescuing borrowers, lenders and investors from the consequences of their own bad decisions. That is why few are suggesting direct support for borrowers who can’t afford their loans. Mr. Paulson has decided his best option is to prod the markets to sort matters out themselves, as long as companies bear in mind the public interest in keeping people in their homes.”
Paulson, Banks in Talks to Stem Surge in Foreclosures [Bloomberg]
U.S., Banks Near A Plan to Freeze Subprime Rates [WSJ]
JustQuotes: What’s The Cause And What’s The Effect? [SocketSite]

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Comments from “Plugged-In” Readers

  1. Posted by S&S

    “Officials in Washington have been cautious about steps that would be seen as rescuing borrowers, lenders and investors from the consequences of their own bad decisions. That is why few are suggesting direct support for borrowers who can’t afford their loans. Mr. Paulson has decided his best option is to prod the markets to sort matters out themselves, as long as companies bear in mind the public interest in keeping people in their homes.”
    I’m not even going to respond to this the way I really would like to, because such filth should never spew from a lady’s mouth … let alone be put in writing.

  2. Posted by vox

    Moral suasion is much cheaper than a tax credit.

  3. Posted by Jamie

    On a related note, how’d you like to be a public employee in the State of Florida and not receive a paycheck today because one of the state’s money market-like portfolios froze the fund after a run of withdrawals dropped the balance from about $28 billion to half that? Wow.

  4. Posted by Amen Corner

    How would you like to be renting in an area where a lot of property was bought with subprime loans, chose to be fiscally responsible by not taking out a suicide loan, and now see your less responsible neighbors get potentially bailed out of their reckless financial decisions, thus helping to support property prices at a level beyond which you can afford to buy? Moral hazard? lol

  5. Posted by Dude

    Gavin & team are pushing for this right here in San Francisco. Although I have no idea why rich San Franciscans would need any help….aren’t we all luxury millionaires here?
    http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/11/30/BUD3TLBVG.DTL

  6. Posted by diemos

    Tsk. If only some of Gavin’s staffers read socketsite then they would know that everyone in SF who used a teaser loan was a financially sophisticated millionare with enough money in the bank to easily pay off the loan. They just wanted the tax advantages and went stated because they couldn’t be bothered to dig up their 1040’s.

  7. Posted by Richie Cunningham

    The sanctity of the American homeowner is one thing, but I dream of a different reality, one in which a cautious (somewhat embittered) renter can crawl out of a $2000/month cave, secure rent in a 1,500 sq ft loft, lease a new SUV with a flip-down entertainment system and upgrade from Old Navy to GAP. AND THEN, when he fails to pay his rent/ lease/GAP credit card, just when he thinks he really f*cked up, he finds that the government’s got his back. That these kind folks are gonna tell the tricky landlord, the shadowy bank behind the landlord and most significantly, the blessed homeowners of the country, to help the poor, honest renter out of the bind he was trapped into and to keep him in the loft/Expedition/khakis that he’s entitled to.
    Let’s be honest here, free markets work just fine on paper but who’s gonna help the little guy? [From himself]

  8. Posted by tipster

    Anyone who thinks this freeze is going to do anything but make the problem worse should google “Nixon Wage Price Controls” to see how well these things do.
    The answer is that it chases investment money away and makes the problem worse.
    A very small number of people will remain in their homes. A very LARGE number of people will now have trouble qualifying for a mortgage if they can find one at all. The problem will be made worse.
    As for Jamie’s comment about teachers pay, this is actually the only positive thing to come out of the whole mess. That’s to say that investors are learning (gasp!) that there are *consequences* to their actions. When you pretend to *invest* money in fueling a bubble, you should either get out early or plan to get burned when it starts to pop.
    The whole housing problem would not have happened without willing investors like the teachers stupidly loaning money to people with no income and no money down buying ever higher and higher priced houses. Other than reading some sad sack article about some day laborer who made $3 per day and bought a million dollar home with cash out and now was losing “his” house, the entire country thought there were no consequences (other than some heads of investment banks being “fired” and handed $160 mil as they walked out the door).
    Surprise: the investors invested in a ponzi scheme and, despite everything smart finance people have been doing, we’ve run out of “Peters” to rob to pay Paul.
    Instead of peters, all we have now are dicks. The dicks who pretended they were “investors” while the smart money stayed away.
    The beginning of the real problems starts now: the freeze is only being done to slow down the massive effect of all of this. The freeze exists because we’ve run out of peters to pay paul so we just decide to cut what we are paying paul.
    But these things never work. They just make the problem worse.

  9. Posted by dub dub

    If I sell you a 300k property for 500k using a funny loan, and you are dumb enough to pay it off (or maybe only 400k of it after the loan is “restructured”), that’s good for everyone: I’ve ripped you off, can brag about how I’m “helping you”, don’t need to write as much off my books, and you can feel morally superior.

    The problem would be if these funny loans were still available at the same rates — if they were, that would still be a 500k house, and you would be getting a true bailout (no fair!!!). But they’re not, so anyone who agrees to continue paying their suicide loan (rather than walking away from it) is the greatest fool of all!

    It’s genius, actually.

  10. Posted by Jeff

    The ONLY reason why city, state and federal governments want to stem foreclosures is so they can still collect the 1% – 3% property tax every year. Just saving one million dollar house in SF contributes approx. $13,000 a year in property taxes to SF government. If it was priced at $500,000 (which is what it should be), then you would only pay $6,000 a year. Why would anyone want to own a house that’s overpriced to begin with and still hold on to it? You are losing $1,000 – $3,000 a month in value every time you hold on to it in addition to all of the taxes, fees and mortgage every month. Like the saying goes, there’s a sucker born every minute.

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