Making a deal with the Devil: Bush and the banks could freeze adjustable mortgage rates

I know. Your first question is, “Which one’s the Devil?” Good question, considering Bush’s second term is being sponsored by the banking industry.

In any event, according to AP Reporter Martin Crutsinger, an agreement between the Bush administration and some of the country’s biggest banks to freeze adjustable interest rates is close. Using a something-is-better-than-nothing rationale, the big banks are considering freezing the initial “teaser rate” on many of their subprime loans. Given the watered down nature of their proposal, two things are for sure: (1) there will be an agreement and (2) it will fall well short of what is necessary to fix this catastrophic problem.

The sticking point in the negotiations is how long to freeze the teaser rate. Some regulators are pushing for a seven year period, the time estimated it will take to recover from this huge mess. Predictably, banks and the investors that purchased the junk mortgages want a much shorter period. An estimated 2 MILLION subprime mortgages are scheduled to “reset” from the initial teaser interest rate to a much higher rate, increasing monthly home mortgage payments up by an average of $350.

The measure does not address the 4 MILLION subprime borrowers who have already experienced rate reset shock. While many of them have already been forced out of their homes, many more struggle by the skin of their teeth to keep up with their mortgage payments. Will these absurdly high interest rates drop down to the initial teaser rate (or any other reduced rate for that matter)?

Neither the banks nor the President’s administration have any credibility on this issue. Remember, it was the banking industry’s lax lending standards and shady practices that artificially inflated then burst the housing bubble. It has been well documented in interviews with subprime borrowers and underwriters that income data was being “fudged” to approve unqualified borrowers for enormous loans. And, of course, 96 percent ($24 million) of the president’s second-term inaugural fund came from corporations, their chairmen, CEOs, presidents, or owners. Not exactly a man of the people.

The real solution seems to be the proposed Home Owners’ Mortgage and Equity Savings (HOMES) Act (S.3778 / H.R.2133) which would allow reformation of mortgages in bankruptcy court.