The Bush administration announced a plan that freezes interest rates for some credit-challenged homeowners who purchased their homes with subprime loans. President Bush called for Federal Housing Administration reforms to lower borrowing requirements for FHA conforming loans, and a five-year freeze on some subprime mortgage loans. Eligible borrowers are those holding adjustable rate mortgages that are about to reset to higher rates and who are current in their payments.

The move will potentially minimize losses to banks, securities investors, and the economy, by keeping more homeowners out of defaults and bankruptcies.

But not everyone is cheering. A recent poll by the National Taxpayers Union found that almost half of U.S. adults think a federal bailout is the wrong way to go. Tax dollars shouldn't be used because many homebuyers who are now in trouble deliberately bought more house than they could afford. Further, many blame Wall Street, which sold mortgage-backed securities to investors while underplaying the risks of subprime loans.

Standard and Poor's argues that a freeze will "have a negative impact on the ratings of certain U.S. first-lien subprime residential mortgage-backed securities." The risk is that smaller payments won't make enough money available to pay investors. If you can't get investors to buy the securities from banks, banks can't get resupplied with money to loan out to fresh borrowers. Subprime mortgage lending, about 10 percent of the market, comes to a halt.

Treasury Secretary Henry Paulson insists the interest freeze is only available to homeowners occupying their homes, not for real estate speculators. But any freeze on mortgage interest rates amounts to a subsidy that does nothing for the homebuyers who did all the right things, including buying within their means.

While the debate goes on, other help is on the way. This week, mortgage interest rates fell to two-year lows. Some borrowers may be able to refinance their loans into safer fixed-rate without waiting for a federal handout.

That begs the question -- how many homeowners can be helped by simply allowing the markets to work?

Published: December 7, 2007

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