Friday, December 07, 2007

Subprime rates frozen for 5 years

President Bush has enacted one of the stupidest, yet most popular, pieces of legislation ever. In recent months, foreclosures and defaults on home loans have skyrocketed as the subprime credit problems continue to emerge.

Rather than allow the free market to correct these mistakes and interest rates to rise, the US government is hampering the market in 2 ways. Firstly the Federal Reserve continue to push the interest rates down to "help out" borrowers and prevent massive foreclosures. And now the President is forcing lenders themselves to lock in these rates for 5 years, even though billions of dollars of loans were meant to be reset in the coming months.

This isn't a social welfare issue of helping out the poor and overstretched borrowers. This is a massive economic blow that doesn't allow the bad debts to be liquidated and written off, and drags the problem on for years rather than allowing the free market to solve it quickly and sharply. It also punishes responsible people who managed to save and not push themselves into massive levels of unmaintainable debt.

Darren McKinney, 48, a renter in the District, said he has been waiting for housing prices to fall so he can buy a condo without resorting to a dubious loan. He turned down an opportunity to buy his 600-square-foot apartment for $310,000 in late 2004 because he thought it was “absurdly overpriced.”

Now the government is rewarding people who made irresponsible decisions and bought homes beyond their means, he said.

“There are those of us who purposely sat on the sidelines during the course of the last three years while the senseless frenzy was going on, and we presumed the free market would be allowed to correct itself,” McKinney said. “The government is now meddling in the market and looking to prop up lenders and borrowers alike, and those of us who wisely bided our time get screwed.

(hat tip: The Liberty Papers)