Subprime relief: Winners and losers |
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There's a value judgment lurking in Bernstein's use of the word "shouldn't" -- that borrowers "shouldn't be losing their homes." One might just as easily use the same word to say that these borrowers shouldn't have gotten subprime loans that they couldn't afford after rate reset. But it's not as simple as that, Bernstein says. People made mistakes and passed off the risk all along the lengthy chain, from the borrowers to the holders of mortgage-backed securities.
"There were a lot of market failures that went on here, and when the market fails, the government should step in and take some action," Bernstein says.
He echoes an argument made by the FDIC official that the policy helps lenders and mortgage investors, too.
"If these homes end up on a market that's awash in inventory, they're not going anywhere anyway," Bernstein says. "If you foreclose on one of these homes, you have an asset that's depreciating quickly."
In this case, one person's calamity can be another person's bargain. That brings us to the losers under this plan.
Losers
Clearly house prices in many markets will fall over the coming months and years. The question is how far values will fall, and how long it will take. If subprime resets add to the wave of foreclosures next year, there will be more vacant houses for sale in some markets, and prices will plunge. When they have fallen far enough, buyers will flood into the market and prices will rise.
If the big lenders and federal government adopt the plan to freeze subprime ARMs' introductory rates, there will be fewer foreclosures. Prices won't fall as rapidly. Buyers might be more reluctant to buy, and a recovery in prices could be delayed.
That scenario is possible, says Michael Moskowitz, president of Equity Now, a mortgage lender in New York City. He acknowledges that it would be bad news for first-time buyers and bargain hunters.
"But we're in this, and it's getting worse, and I'm sort of afraid to let the movie play out to the end without changing the script," he says.
Moskowitz says he feels torn. He favors the least possible government intervention in the marketplace, but it seems warranted this time.
"Up until several weeks ago, I was going, 'People made their own beds. Let them sleep in them.' But you can't punish everybody for the excesses of the speculators."
In the next breath, Moskowitz worries about unintended consequences: "I'm sort of torn. Many of these buyers knew exactly what they were doing."
Lenders have to watch out for borrowers who gamed the system once and who will try to do it again.
Then there are homeowners who followed the conservative route of saving up for a down payment, buying a house within their means and getting a fixed-rate mortgage. To them, the rate-freeze proposal makes a mockery of responsible behavior.
"You're rewarding what I think is irresponsible," says Renee Wajda, an engineer who owns a home near Philadelphia. "And in a way you are also rewarding the industry, because you're insulating them from foreclosures."
She says she feels ambivalent about the proposal. "If I had a neighbor going through this, I guess I would like it, from a selfish standpoint," Wajda says. "From a moral standpoint I don't think it's a good idea. I just think that it rewards people for going out on a limb. The whole thing with an ARM is that risk is involved. When you get rates at rock bottom, there's generally only one direction that rates will go."
That would be up.
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