Five Year Mortgage Rate Freeze Plan Finalized

It looks like the writing is on the wall, as far as the knee-jerk mortgage rate freeze plan becoming a reality. Some highlights include:

Another person familiar with the matter said the rate-freeze plan would apply to borrowers with loans made at the start of 2005 through July 30 of this year with rates that are scheduled to rise between Jan. 1, 2008, and July 31, 2010.

Paulson, who has been leading the effort to craft a plan, said on Monday that the program would only be available for owner-occupied homes — as a way to make sure that the break is not granted to real estate speculators.

The administration plan is designed to deal with the crisis by allowing subprime borrowers who are living in their homes and are current on their payments to avoid a costly reset for five years. The hope is that by that time the housing downturn will have stabilized, clearing out the glut of unsold homes and halting the steep slide in prices that is occurring in many parts of the country.

With sales and prices once again rising, the expectation is that homeowners will be able to renegotiate their current adjustable rate mortgages into a more affordable fixed-rate plan.

Call me cynical, but I can’t help but view plans like this as political posturing, plain and simple. There are always going to be exceptions to the rule, but I’d hazard a guess that at least 50% of the people facing foreclosure due to ARMs resetting are also up to their eyeballs in consumer debt, and that the possibility of foreclosure isn’t a result of predatory lending but of their own inability to avoid the lure of using credit to spend money they don’t have.

Giving someone who can’t balance their spending or don’t have enough common sense not to buy a house they can’t afford a five year reprieve isn’t going to accomplish much in the end. And putting any faith in the fact that prices will rebound and shoot upwards again, producing enough equity in their home to refinance with ease is, at the very least, wildly optimistic, if not out and out crazy talk.