Gee, that'll solve everything
With millions of Americans stuck in subprime adjustable-rate mortgages due to reset in the next year, what can be done to ensure they won't go into foreclosure? The head of the FDIC says she has a cracker-jack idea:
The heat on U.S. mortgage lenders and servicers was turned up a few degrees this week when the country's chief bank regulator publicly proposed that they permanently freeze interest rates on subprime adjustable-rate mortgages (ARMs) for many homeowners.
"Keep it at the starter rate. Convert it into a fixed rate. Make it permanent. And get on with it," Federal Deposit Insurance Corp. Chairman Sheila Bair said in prepared remarks at an investor's conference…
Bair proposed that servicers convert only those ARMs that haven't reset yet and only for borrowers who are current in their payments and occupy their homes. Loans taken out by speculators who don't live in the homes they bought would not qualify for the automatic conversion.
Consumer advocates have also been calling on lenders and servicers to modify subprime mortgages to make the payments affordable for homeowners who would struggle to keep the house once their rates reset. But rate reductions, while they do happen in some cases, are far from widespread, they say.
"We can't just sit here doing this kind of case-by-case, laborious restructuring process with all these millions of subprime hybrid ARMs," Bair said, citing a recent Moody's survey, which found that less than 1 percent of problem subprime ARMs were being restructured.
Gee, that'll solve everything, won't it? Bair is telling the banking industry to swallow the losses and, in her words, "Get on with it." Easy for her to say, given Ms. Bair's background. Let's review her Wikipedia entry:
Before her appointment to the FDIC, Ms. Bair was the Dean's Professor of Financial Regulatory Policy for the Isenberg School of Management at the University of Massachusetts-Amherst since 2002. Other career experience includes serving as Assistant Secretary for Financial Institutions at the U.S. Department of the Treasury (2001 to 2002), Senior Vice President for Government Relations of the New York Stock Exchange (1995 to 2000), a Commissioner and Acting Chairman of the Commodity Futures Trading Commission (1991 to 1995), and Research Director, Deputy Counsel and Counsel to Senate Majority Leader Robert Dole (1981 to 1988). While an academic, Chairman Bair also served on the FDIC's Advisory Committee on Banking Policy.
In other words, a lot of wonky academic and government work and not a bit of practical experience doing real, practical, day-to-day… well, banking-type stuff.
The Survival Report's Mish Shedlock — who has decades of such experience — says there's another name for Ms. Bair's proposal — central planning.
The proposal to cap the Rate of ARMs is no different than long failed Russian central planners attempts to fix prices, President Nixon's foolish wage and price control mandates, the Fed's irrational insistence that it can "control" prices, or China's recent attempt to rein in price hikes by decree…
It should not take a genius to figure out that if ARMs rates are "frozen" at a point where the market does not think rates should be, there simply will be no more ARMs offered. Furthermore, to cover the cost of existing ARMS, prices would rise on new fixed rate mortgages. Oddly enough, price fixing ARMs would not even help the person most at risk because that person cannot afford the teaser rate, let alone the cost of a current ARMS rate. Thus price fixing ARMs is a sure fired guaranteed way to cause a continued weakness in home prices, if not an actual out and out crash.
But we shouldn't expect Ms. Bair to be any more cognizant of the consequences of her proposals than Alan Greenspan was of his 18 years of actions at the Fed, now should we?