The Secretary of the Treasury, Henry Paulson, held a press conference Monday that discussed….well, it’s probably a bit much to call it a plan. Perhaps it’s best described as a focusing of effort. Quoting his prepared remarks:
While the reality is a bit more complex, in the interest of simplicity, there are four categories of subprime borrowers. There are those who can afford their adjusted interest rate; these homeowners need no assistance. There are also a substantial number of homeowners who haven’t been making payments at the starter rate on their subprime loan and may not have the financial wherewithal to sustain home ownership; some of these homeowners will become renters again. A third category of homeowners might choose to refinance their mortgage - putting them in a sustainable mortgage while keeping investors whole. This is the first, best option. Servicers should move quickly to assist those who can refinance.
And the fourth category is those with steady incomes and relatively clean payment histories who could afford the lower introductory mortgage rate but cannot afford the higher adjusted rate. We are focusing on this group, determining who they are and what steps may appropriately assist them.
The dividing lines between the groups apparently isn’t fully fleshed out. However, already some folks are noticing that it may be more advantageous to be in one group than another. For example, consider this thought from WiseBread:
Perhaps even better than being in category three, though, would be to find yourself in category four.
At this stage, there are no rules written to establish who falls into this fourth category. However, it occurs to me that one of the reasons that someone might be able to afford a mortgage at a teaser rate, and yet not be able to afford it after a reset, is if someone has too much other debt. If that’s the case, it might be awfully tempting for such someones to take on a big chunk of extra debt and thereby move themselves out of category one and into category four.
It seems clear that if you just blow all that money on high living (or, you know, medical bills), that you’d find yourself in category four. (Don’t borrow too much and put yourself into category two. That’d suck.) But maybe there’d be some way to borrow the money and then spend it not on high living, but rather something of lasting value. Depending on exactly how the rules end up getting written, it might be something as simple as savings bonds; it might have to be something risky like land or a long-term, interest-free loan to your brother-in-law. Then, once you’d kept your loan from resetting, you could probably get your money back—if whatever you bought really was a thing of lasting value—and pay off that extra loan that put you into category four.
While I applaud the notion that a fix to the mess could provide the opportunity for some to turn a bad situation into a more advantageous one, I am miffed that such a benefit will likely come as an expense to the rest of us somehow, in the form of an additional burden on government expenditures (to the extent there’s federal financing or insurance provided).
And there is the whole “if we had known about this coming down the pike, we might have gone with an ARM mortgage…” syndrome.
However, I suppose that I should take some comfort in the concept that government action to cushion this crunch will hopefully head off additional economic instability if foreclosures were to spike, etc.
And, on the seeming unfairness front…well, we do have the premise underlying parts of capitalism that with taking greater risk, there is a chance of greater reward (as well as greater loss). By taking the safe, responsible route, my family won’t reap the benefits of the bailout, but at least we haven’t had to worry about a massive interest rate reset impacting our budget.