Monday, December 10, 2007

Bailout for Whom?

Alan Reynolds has a sobering look at the "sub prime bailout" today on the editorial page of the WSJ:

In reality, the only financial aid in this plan goes to those who qualify for the five-year freeze on mortgage rates -- a curiously selective little group, estimated to number between 145,000 and 360,000.

When it comes to resetting mortgage payments below the level borrowers agreed to, why give a special deal to Sam but not Suzie? On the day the plan was unveiled, the Mortgage Bankers Association reported that 0.78% of mortgages went into foreclosure in the third quarter, and that 5.59% were far behind in their payments. Neither group qualifies for any help under the Bush plan. Neither does anyone with imperfect timing -- those who took out a mortgage before 2005 or after this July. Among the few lucky enough to slip through that narrow window, the primary criterion for a rate freeze is a weak credit rating, below 660. And what happens after five years? Presidential contender Sen. Hillary Clinton is already talking about stretching it to seven years, and that bidding war has just begun.

On the face of it, these criteria for political favoritism seem only marginally more sensible than limiting special loan terms to, say, short people or redheads.

The result of this "bailout" will be negative for future sub prime borrowers and will just prolong the agony of the housing market adjustment. Considering the limted pool of borrowers that this plan is supposed to help it would obviously be better if this just died a quiet death.

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