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Minyan Mailbag: Another Adverse Impact of the Planned Rate Freeze


The freeze on rates will also affect those lower-to-middle income households who might still actually want to buy a house one day.



Regarding your discussion in today's Five Things of the plan to freeze rates on certain subprime loans, yes, it is true that the investors holding the mortgage backed securities will get screwed. Another class who will be adversely impacted (okay, your word is better) by this are those lower-to-middle income households who might still actually want to buy a house one day.

To the extent that freezing rates does keep people in their homes, it either prevents or at least limits the price correction that is badly needed to restore affordability to the levels that prevailed before the housing boom began. With a higher threshold for down payments and tighter mortgage lending standards in general, what will be artificially high prices will make it that much harder for such households to purchase homes. (This of course leaves aside the whole issue that, to the extent that house prices have already fallen, it is likely that a large share of those homeowners who do have their interest rates frozen will continue to struggle to pay for an asset that is worth less than what they owe on it.)

Combine this plan with other proposed legislation, such as eliminating early payment penalties, raising the legal threshold for foreclosures, and holding purchasers of mortgage backed securities liable for the actions of the mortgage brokers, and what you've basically done is dry up the secondary market, which in turn means even fewer funds for mortgage originations, which again will be felt the most by lower-to-middle income households.

I summed this up yesterday in my release on the home sales data by saying that the policy makers have "evolved" from being blind, i.e., somehow managing to miss the worst of the mortgage lending excesses while they were going on, to simply being shortsighted, i.e., being unable to understand the impact of today's policy changes on tomorrow's home sales. Not clear which is worse.

Richard Moody
Chief Economist/Director of Research
Mission Residential

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