Vegas
03-25-2008, 02:26 PM
http://article.nationalreview.com/?q=ZTYwNjg3N2QzMzQ1NjA5YTcyZTk0YmU1ODU2ZTcxNjk=
Hillary Clinton unveiled a plan on Monday to deal with the nation’s mortgage crisis. Clinton wants to “freeze” interest rates on hundreds of thousands of adjustable-rate mortgages, which would prevent them from resetting to higher rates over the next five years. Mortgage servicers that go along with her plan would in many cases be breaching their contracts with investors in mortgage-backed securities, so Clinton proposed legislation that would shield them from any resulting lawsuits.
Just a few weeks ago, Clinton was in the news for opposing legal immunity for telecommunications companies that cooperated with the Bush administration’s terrorist-surveillance program. If you needed to illustrate the Democrats’ priorities right now, it would be hard to find a better example.
Adjustable-rate mortgages, or ARMs, are home loans in which the borrower starts out paying a low, “teaser” rate of interest which resets to a higher rate over the course of the loan. A lot of borrowers who took out ARMs at the height of the housing boom now find their interest rates jumping just as the credit crunch is making it harder to refinance. When politicians talk about rising rates of foreclosures, a lot of them blame ARMs and argue that borrowers should not be held to the terms of these loans because in many cases they were “hoodwinked” (a word Hillary used in a debate last month) by unscrupulous lenders.
As this drama plays out, Wall Street investment banks find themselves in the midst of an epic crisis over the valuation of securities backed by these kinds of mortgages. During the housing boom, Wall Street overvalued these securities based on the mistaken assumption that housing prices would continue to go up. When the housing market went south, investment banks found themselves holding a bunch of mortgage-backed securities of questionable worth, which sent investors into a panic.
Most of the uncertainty stems from the market itself and the question of how many homeowners will default on their loans, but Washington’s promises to get involved at the level of mortgage servicers and borrowers have not gone unnoticed. Last December, the Bush administration announced a deal with mortgage servicers to allow cash-strapped borrowers to keep paying the teaser rate on their ARMs a little longer. Hillary Clinton would go further, of course, and expand the number of ARM borrowers eligible for a rate freeze.
It’s not hard to get mortgage servicers to sign off on such deals. Mortgage servicers take a small percentage of each payment, and that percentage stays the same whether the borrower is paying a low teaser rate or a higher adjusted rate. For the mortgage servicer, it’s more about keeping the payments coming.
Mortgage holders — including investors in mortgage-backed securities — also want the borrower to keep making payments, of course, but they are naturally more interested in holding the borrower to the agreed-upon terms of the loan. The contracts they enter into specify the circumstances under which mortgage servicers can work out deals with cash-strapped borrowers.
Clinton’s plan to provide legal immunity for mortgage servicers would throw those contracts out the window, increasing uncertainty at a time when uncertainty is the problem. Credit would continue to dry up as lenders and investors — already leery of the U.S. mortgage market — would suddenly have a real reason to steer clear.
Clinton’s offer of liability protection to the mortgage servicers is especially galling in light of her opposition to immunity for the telecommunications companies who aided the government’s terrorist surveillance efforts. To paraphrase a colleague, why are Democrats libertarians on national security but authoritarians on practically everything else?
Hillary Clinton unveiled a plan on Monday to deal with the nation’s mortgage crisis. Clinton wants to “freeze” interest rates on hundreds of thousands of adjustable-rate mortgages, which would prevent them from resetting to higher rates over the next five years. Mortgage servicers that go along with her plan would in many cases be breaching their contracts with investors in mortgage-backed securities, so Clinton proposed legislation that would shield them from any resulting lawsuits.
Just a few weeks ago, Clinton was in the news for opposing legal immunity for telecommunications companies that cooperated with the Bush administration’s terrorist-surveillance program. If you needed to illustrate the Democrats’ priorities right now, it would be hard to find a better example.
Adjustable-rate mortgages, or ARMs, are home loans in which the borrower starts out paying a low, “teaser” rate of interest which resets to a higher rate over the course of the loan. A lot of borrowers who took out ARMs at the height of the housing boom now find their interest rates jumping just as the credit crunch is making it harder to refinance. When politicians talk about rising rates of foreclosures, a lot of them blame ARMs and argue that borrowers should not be held to the terms of these loans because in many cases they were “hoodwinked” (a word Hillary used in a debate last month) by unscrupulous lenders.
As this drama plays out, Wall Street investment banks find themselves in the midst of an epic crisis over the valuation of securities backed by these kinds of mortgages. During the housing boom, Wall Street overvalued these securities based on the mistaken assumption that housing prices would continue to go up. When the housing market went south, investment banks found themselves holding a bunch of mortgage-backed securities of questionable worth, which sent investors into a panic.
Most of the uncertainty stems from the market itself and the question of how many homeowners will default on their loans, but Washington’s promises to get involved at the level of mortgage servicers and borrowers have not gone unnoticed. Last December, the Bush administration announced a deal with mortgage servicers to allow cash-strapped borrowers to keep paying the teaser rate on their ARMs a little longer. Hillary Clinton would go further, of course, and expand the number of ARM borrowers eligible for a rate freeze.
It’s not hard to get mortgage servicers to sign off on such deals. Mortgage servicers take a small percentage of each payment, and that percentage stays the same whether the borrower is paying a low teaser rate or a higher adjusted rate. For the mortgage servicer, it’s more about keeping the payments coming.
Mortgage holders — including investors in mortgage-backed securities — also want the borrower to keep making payments, of course, but they are naturally more interested in holding the borrower to the agreed-upon terms of the loan. The contracts they enter into specify the circumstances under which mortgage servicers can work out deals with cash-strapped borrowers.
Clinton’s plan to provide legal immunity for mortgage servicers would throw those contracts out the window, increasing uncertainty at a time when uncertainty is the problem. Credit would continue to dry up as lenders and investors — already leery of the U.S. mortgage market — would suddenly have a real reason to steer clear.
Clinton’s offer of liability protection to the mortgage servicers is especially galling in light of her opposition to immunity for the telecommunications companies who aided the government’s terrorist surveillance efforts. To paraphrase a colleague, why are Democrats libertarians on national security but authoritarians on practically everything else?