Tuesday, December 4, 2007

Objections To Subprime Rate Freeze Legislation

From CNBC:

“Many hedge funds, along with other institutional investors such as mutual funds, money market funds and retirement plans, are invested heavily in mortgage securities. Some hedge funds in particular made strategic bets on the decline of the subprime mortgage market, and they could argue that the government-backed plan is unfair meddling that will cheat them out of money.”

From The Wall Street Journal:

“Even some subprime borrowers object to the plan. Justin Miller, a 27-year-old mortgage broker in Coral Springs, Fla., says he made a bad investment decision when he bought a $600,000 oceanfront home last December with two subprime loans. But he's committed to making the $6,000 in monthly payments -- and the higher payments once the rates go up.

‘A lot of people are trying to point fingers and get themselves out of something they put themselves into,’ he says. ‘I put myself in this position. I need to find a way to make it work.’

Mr. Miller says that the rate-freeze proposal reminds him of a television commercial: The announcer asks, ‘Do you owe back taxes?’ A client responds, ‘I settled for half of what I owe.’ Says Mr. Miller: ‘How's that fair? Everything seems to be backward.’”

From City Journal:

“The Paulson plan’s flaws are manifold—and fatal. First, it will reward and encourage irrational behavior by future home buyers. It wasn’t logical for people to take on mortgage obligations that they couldn’t afford, but it will become logical in the future if they can reasonably expect that the government and their lenders will bail them out when the going gets tough.

Second, the deal will thwart the market by keeping home prices artificially high. In recent years, laughably easy credit has allowed many people to ‘buy’ homes who otherwise couldn’t have. We’ve had ‘liar’ loans, in which people could claim a false annual income without fear that their mortgage lenders would confirm the figure. We’ve had ‘Nina’ loans (short for ‘No Income, No Assets’). And we’ve had ‘Ninja’ loans, for ‘No Income, No Job or Assets.’ Consumers, armed with the easy money provided by these lenient arrangements, have pushed home prices to record levels as measured against personal income. The decline of home prices, then, was both inevitable and healthy. But Hope Now, by placing an artificial floor under home prices, will penalize first-time buyers who did the right thing: not taking out mortgages that they knew they couldn’t afford, but renting instead until prices fell and they could afford homes with more conventional mortgages.”

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