â€œIf you owe the bank $100, thatâ€™s your problem. If you owe the bank $100 million, thatâ€™s the bankâ€™s problem.â€ – J. Paul Getty
Unless you’ve been living under a rock, you’ve no doubt heard that the White House has plans for a subprime bailout. In order to stem the tide of foreclosures, the Bush administration has unveiled plans to freeze the ultra-low teaser rates that were dangled in front of borrowers that shouldn’t have been lent money in the first place.
The simple fact here is that people who couldn’t afford to buy houses bought houses, and lenders that shouldn’t have loaned them the money to do so did just that. Now that these rates are resetting, many borrowers can’t afford the payments, and lenders are facing staggering losses.
Obviously, this is bad for everyone involved. The White House’s proposed solution is to freeze these teaser rates for five years for borrowers that fit certain criteria. But will this really help? As far as I can tell, a temporary rate freeze of this sort will just drag out the inevitable. Given that the affected individuals didn’t have good credit in the first place, and that credit standards have tightened up, they won’t be able to refinance to a more competitive rate in the interim, and this entire mess will just play out in slow motion.
To me, this is a bit like removing Band-Aid. We can either peel it off slowly and prolong the pain, or we can give it a good rip and get the pain and suffering over with. Yes, I realize that sounds insensitive, but… Things have gotten way out of hand, and the people who got us into this mess (on both sides) are in for some rocky times one way or another.
The other thing that really, really bugs me about this “solution” is that it smacks of an administration trying to push the worst of these problems off onto someone else. These loans will ultimately reset, but… That’ll be someone else’s problem at some point down the road. I pity whoever winds up being our next President, as this whole mess is likely to unravel in their lap right as they’re going up for re-election.
So what do you think? Am I being naive in thinking that we should just suck it up and weather the storm right here and right now? Will spreading this debacle out over time help to minimize the damage to our economy? Or will it just prolong the pain?