Don't be fooled. The Bush administration's deal with lenders to get them to freeze interest rates on some adjustable-rate subprime loans isn't really about rescuing lots of homeowners. It's mainly about buying some time for mortgage servicers, Wall Street firms and investors around the world who face a chaotic couple of years as foreclosures rise and a couple million subprime loans reset at higher rates.
Treasury Secretary Henry Paulson made that very clear Thursday afternoon. "This is a private sector initiative to deal with the volume of resets," Paulson said at a press conference following the unveiling of the plan. "You get approximately the same result as if you did it on a case-by-case basis."
Paulson was responding to criticism that the rate freeze is a bailout for the irresponsible - borrowers and lenders alike. "In the normal case this is how markets work," he said.
"There are workouts, and there are modifications." But the specialized nature of modern mortgage markets — in which banks and mortgage brokers make the loans, investors buy them, and servicers collect the monthly payments — can make workouts complicated, and right now the system is overwhelmed by the sheer number of loans running into trouble. A study by Moody's in September found that terms were being modified on only 1% of the subprime loans resetting to higher rates this year — and the Mortgage Bankers Association of America reported this morning that the percentage of all mortgage loans in foreclosure at the end of September was, at 1.69%, the highest since they started keeping track in 1972.
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