Yesterday Governor Schwarzenegger held a press conference in Fresno to talk about the horrible situation facing many, many California families who opted to take out sub prime loans to afford their homes, only to find that with a downward shift in the economy, the adjustments coming in the interest rates for those loans will lead many of these borrowers to default on their payments, and lose their home.
At the event, the Governor announced that he had negotiated with lending companies (representing 25% of existing home loans in California) who have agreed in some manner to not implement the scheduled hike in interest rates for some home owners. It is still unclear exactly what this means at this point, as the details are a bit vague. It sounds like in those instances where someone is still making their payments, and can demonstrate to the lender that they can afford to continue to make their current level of payment, but cannot afford an increase, the lenders may ‘cut some slack’ as it were, and leave the existing rates for a while.
Let me say that this entire sub prime mortgage issue is a major one, and one with a lot of very real potential tragedy involved. It is certainly appropriate for leaders in government and in business to raise the issue, and dialogue about what things can be done to try to minimize the negative impacts.
That said, I would merely take the opportunity to be a voice of caution. There is such always a tremendous risk when government interferes with the natural course of the free market. There is a very fine line between government regulation, and "negotiation" lead by government policy makers that create an environment where those being "negotiated with" take actions that they otherwise would not do, but for fear that in the absence of being amiable, they might, in fact, face very real onerous government regulation.
From listening to the press conference, it seems like this is not some sort of ‘wholesale’ freezing of rates by lenders. It sounds like there is a commitment to really treat homeowners who are endangered with kid gloves, and try to work with them to keep them from losing their greatest asset — their home!
But I would actually lean on some thoughts penned by Sacramento Bee columnist Dan Weintraub as to why we actually do NOT want any kind of wholesale subsidy of at-risk homeowners by mortgage lenders by freezing their rates. To provide a little bit of context, Weintraub’s piece is an effort to address a proposal made by the head of the Federal Deposit Insurance Corporation, mandating a freeze on loan rates made to so-called sub prime borrowers. Whether it is mandates, or "coercively negotiated," it is a bad idea in the big picture. As Weintraub says, this action, "would actually hurt potential homebuyers who stayed out of the red-hot market rather than buying a home they could not really afford."
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