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Wednesday, December 5, 2007

Looking for simple answers...

Normally when you think of the FDIC you think of the agency that insures your deposits at your local bank and that is it's role. Ms. Bair, however, weighed in recently with her suggestion for a solution to the current sub-prime mortgage mess. Writing in the New York Times; Ms. Bair suggested that, for loan holders who are current in their payments, all of the so-called toxic loans just be frozen at their current levels of interest and not be allowed to reset to new, higher levels that would drive an increasing number of homeowners into foreclosure. It is a simple solution and one that I've mentioned here before. Alas, there seem to be no simple solutions to problems as complex as the mess that we find ourselves in.

From what I've read, there is growing support for this idea in Washington, mainly I suspect because it is so simple and potentially so immediate in it's positive impact. There are likely to be many more than the 2 million foreclosures that we've had this year, if something isn't done to forestall the ARM re-sets that are due next year.

The downside of this suggestion is that it shifts the burden of the problem onto the financial markets - the folks who buy the loans and provide the money for future loans. It also does nothing to help the folks who have already slipped into foreclosure because of re-sets that have already taken place. It also skips over any punishment or accountability for the idiots who made these bad loans in the first place - the greedy mortgage brokers, loan officers and underwriters who were all too happy to put people into these toxic loans.

By shifting the burden to the financial market there is a concern that, because they won't end up earning the higher rates that they anticipated when they bought the paper for these loans that they'll hesitate to buy future packages of loans. I guess I wonder why they would feel that way rather than feel good about not having as many foreclosed houses to deal with, if they let the current scenario play out. It's not as if the suggestion to freeze the rates is going to cause them to loose money; rather it would seem to just be a case of not making as much money. I'm probably missing something in that simple analysis. As for the unfortunates who are already in, or on their way to, foreclosure because of 2007 rate resets, I guess that is just further Collateral Damage (see my post of November 15). The idea, at this point, is to do triage and stop the bleeding before it gets worse.

I'm confident that this or some other "solution" to the problem will be found by our fearless legislators in Washington. After all they've never found an issue that they can't save us from somehow; even if it means saving us from ourselves.

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