Subprime rescue plan, who gets rescued?

With the Bush Administration working on a plan to assist subprime borrowers who are facing trouble, there has been a lot of discussion about the merits of the idea. Certainly one thing that we need to watch is who gets rescued. The details leaked so far indicate that the relief will only go to homeowners who are currently up to date, but are facing adjustments. The fact that the government is stepping in to freeze things is a vast improvement over some of the other plans like Sen. Norm Coleman’s proposal to let people drain their 401K’s to pay off the banks. (All that does is save the banks at the cost of peoples future.) Any relief needs to go to people, and not the lenders. Obviously, any money the government spends will just end up in the lender’s pocket, so that isn’t the best route. We need to remember this mess came about because the lenders were often negligent in making loans to people, who with a little bit of due diligence, the lender would have known couldn’t afford the loan when it adjusted. If a person could only afford the teaser rate, the odds aren’t likely that when a loan adjusts in a year or two, the persons income will have adjusted upward in a similar fashion. Real wages just aren’t doing that. The lenders making the loan were gambling that the market would keep going up and the fact that any headache would have been wrapped up and securitized off to someone else.

But what about others. It won’t do anything for those who are already in trouble. Also what about those homeowners who are making their payments? According to the WSJ there are a number of homeowners who aren’t in trouble, who are upset because the effects the intervention will have on the market and those who can afford (barely) the new adjusted rate.

The WSJ article raises some interesting questions, including should the government keep propping up the inflated home values caused by its years of low interest and loose credit standard loans, it really lets the subprime mortgage industry off lightly by ignoring the role of outright fraud and greed that resulted in people being steered and deceived into these loans. The WSJ knows better.

Anyway, we need to be vigilant, and make sure any relief is real and not just for the lenders.