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Chasing the Dropped Ball... and Deepening the Crisis

Written By Brian Hicks

Posted December 3, 2007

With oil down $12, will “cheaper” gas save consumers some money, so they can shop and rescue the retail holiday season?

Wouldn’t it be nice if it were that easy?

Unfortunately, it’ll take more than a drop in oil to save this sinking ship. And the Bush Administration is very well aware of that. Bernanke and Paulson know that, too, after dropping the ball in early 2007.

So, in an effort to prevent a second recession under the Bush Administration, U.S. Treasury Secretary Hank Paulson is in talks to keep troubled sub-prime borrowers from losing their homes. The Treasury is negotiating with lenders to fix some interest rate to prevent a surge of reset costs.

But is the plan, designed to reach out to the “many Americans” who “may have been misled,” a good idea? Well . . . yes and no.

There are those who may have really been taken advantage of by the sub-prime market. But then there are the market speculators, the ones that bought eight houses with little or no money down. You see, under the bailout plan, we’re supposed to feel bad for them, too. They bought houses they knew they couldn’t afford with an unsustainably high mortgage, and we should help them.

Regardless of who benefits, the proposed freezes would apply ONLY to borrowers who are current on mortgage payments but unable to afford the loans when they reset. Sounds nice, doesn’t it? Unfortunately, of the 1.1 million borrowers in need of bailout assistance, 400,000 of them are already late on payments before they even reset, which should lead to further payment delinquencies and foreclosures.

Take a look at mortgage-backed debt securities as another example. By freezing interest rates, you’re reducing the value of mortgage backed securities, which could eventually lead to more brutal write-downs from financials.

Plus, homeowners are being taught that it’s OK to buy a home they can’t afford now and in future. The government will save them. It’s OK to tap your home like an ATM if the government has your back.

That’s just my opinion, though. I’d love to hear what you think of the bailout news. You can comment below.