One other reason to consider people with fixed rates is that they bought into a market where prices were inflated by sketchy ARMs. Now they can't refinance because the ARM inflated prices are coming back to earth. Many people who would have normally been rock solid mortgage holders are feeling pain because they bought into a house during a price distortion fueled by malfeasance.

Another way the government can stop foreclosures is ask the corporations to freeze layoffs in 2008. In Addition, the introductory period for the 0% interest credit cards should be extended for another 7 years and then the economy will be fine.

I agree that a big part of the run-up in house prices was due to the many exotic ARM-type loans. But remember that lending standards were relaxed for fixed as well as ARM products. So many people holding 30-year mortgages knowingly overextended themselves too. As with the market as a whole, they often did so with the implicit assumption that prices would be moving ever upward.

In terms of the mortgage bailout, I'd just add that this proposed action further muddies the CDO waters. Much of the value placed on CDO's containing ARMs was based on future revenues from higher (i.e., reset) interest rates. Deferring those resets will probably put further downward pressure on these pools of mortgages.

-jim

Caps, freezes, and bailouts don't work. They encourage the same irresponsible behavior again and again. We are seeing this already where people stop paying their mortgages to qualify for assistance. I'm sorry, but if you bought the single most expensive thing in your life to date, and didn't understand every calculation in the math, i have no sympathy.

Those of us responsible enough to stay out of a speculative bubble are the ones that suffer as home prices stay above their long term valuations. Delaying the evenutal collapse of house prices will not help the situation, just prolong the agony.

Home owners who sold and bought again during the bubble, that is just ordinary turnover due to job relocation, etc, may get an undeserved windfall if they financed the new home with an ARM, and rates are frozen. I have no idea what fraction of home purchases this would be.

Dean,
Good post. My only problem with it is that I suspect it will be very hard to separate out the deserving from the undeserving of those who will get windfall gains out of this. The complaints that this is unfair and arbitrary do have some bite, but I suspect that this will help ease some of the upcoming down drag of housing prices this coming year, given the supposedly high number of resets that are (were) due.
What do you think of Hillary's proposal to freeze foreclosures?
Also, I just noticed that you still have the now defunct maxspeak on your blogroll, but not its (I hope) worthy successor, econospeak. Tsk tsk...

Dean, You're on the wrong path here & the longer you stay on it I believe the more difficult it will become.
I agree with CT and I'll ask that we also consider the effect on young families who will look to buy their first homes in the next decade. Subsidizing bozos who were greedy, stupid or easily duped will artifically increase home cost for first time buyers. These youngsters are our future community leaders and it would be nuts to exclude them from buying into the American Dream and certainly not in our long term best interest.
Further, it's nonsense to elevate the issue to this level of importance while we refuse to consider home ownership in measuring inflation.

"There is no reason to come to the aid of investors holding bad mortgages; they were supposed to have known what they were doing."

Shouldn't people who signed their names for hundreds of thousands of dollars of debt payments known what they were doing?

This also hurts those that saved their money instead of buying at inflated prices.

This hurts future buyers because when someone's payment is frozen that is in effect buying a home for thousands(or hundreds of thousands) less than what the loan was. if you bought a $400,000 home but the payment freezes to the equivalent of a $300,000 that is a subidy. that's a price that other can't get.

A house that someone can't afford w/o the freeze but can now with the freeze doesn't go into foreclosure and doesn't go into inventory and drive down home prices which is what needs to happen. these people don't deserve a house and probably can't afford it anyway. most people who can't afford it would be better off taking a loss and renting that same house(but maybe not that house) for half the cost of owning and be able to build up saving. the war on savers continues.

Dean,

Fixed rate buyers who got in with minimum down payments, yet purchased at wildly inflated prices may also find themselves underwater.

Let me comment by relating the details of my home purchase in October,
2006.

The original listing price: $189,000.

What I coughed up: $142,500.

What the seller paid for the home in 2001: $67,000.

What the banking industry allowed the seller to refinance the property
for: $130,000.

I did not learn the final number listed until the closing. Of course,
it did constrain the seller from refusing my initial offer for
$134,000. I thought allowing for 100% appreciation over five years
was a generous offer! Evidently, some mortgage company thought nearly
that amount was fiscally prudent. (Let me clear my throat.) I did
justify my seemingly low-ball offer by stating a desire to obtain a
conventional mortgage. The seller responded that he used ARMs to
purchase two properties in Florida. I beat back the pressure from the
seller and his agent to offer considerably more and finance it
creatively.

So here is the nub: I already bailed out the seller from an ill
advised refinance deal. Do I now suffer in terms of more expensive
personal credit to bail out his two ARMs?

Ouch!

What Plan ? ...

Noone has yet to get the details. This looks like the Katrina response all over again: Talk , talk, talk until the prroblem goes away or Bush's term ends.

Bush help? Be afraid , very afraid , just any Iraqi !

Keep your eye on the ball. I have two very real concerns.
First, the $51 billion FHLB loan to Countrywide is just plain nuts & probably illegal. It's outrageous that every media outlet doesn't lead with this story every day until it & the people responsible for it EXPLODE!
Second, I think the Nat'l. Realty Assoc. is pushing a LOT of ideas that may or may not go anywhere. I think what they really want is to raise the FANNIE & FREDDIE MAXES in the highly inflated bubble states to $800k. This shouldn't bother you if your last name is Countrywide, if you already own in one of these ridiculously priced Bubble states or if you're old & hate your kids & grandkids.

This a tough one. I'd like to see the people involved let go to plummet, because it would be a deterrent by showing there are consequences for bad behavior. And not letting them plummet lets the truly bad actors off the hook; rewarding them for their crookedness.

But this is a big crime. If letting them plummet will throw us all under the bus, then it isn't good. A decade-long depression (Great Depression II) would hurt far more than just the bad actors and dumb buyers. So I think we have little choice but to bail out people, even though we'll be bailing out some crooks. What we do need is to be able to see this sort of thing coming so we can stop it in time; to do that we need effective regulation to keep this from happening in the first place. It's too late to do that now in this instance. Right now it's too late to do the right thing; we have to do the necessary thing.

There is no means of avoiding the final collapse of a boom brought about by credit expansion.

wow, I never thought I would be lumped in with the bailout speculators crew. I don't think my own to rent plan (which is capped at the price of the median home in an area) really fits that bill. It provides limited relief to a narrow group of homebuyers. I don't want to see people made homeless and if we can give them the opportunity to stay in their homes at no cost to the taxpayer and just a bit more pressure on lenders, then I don't really see much of a downside.

btw, Bailey is absolutely right about the $51 billion in loans from the Home Loan Bank Board to Countrywide -- this is a scandal. we should own Countrywide and the execs should be out on the street.

I just saw a Countrywide TV commercial last night - it seemed to be offering the same kinds of impossible credit as before.

Dean, I'd also like to give (those first time buyers in lower cost areas) "the opportunity to stay in their homes at no cost to the taxpayer and (with) just a bit more pressure on lenders".
You were THE first Economist (back in '02?) to warn elequently & decidedly of the enormity of the problems we'd face IF housing prices continued to increasingly diverge from incomes. So, it's understandable if many now turn to you for a quick & "fair" solution.
The simple truth is, the shenanigans continued way too long for anyone to deliver a quick & equitable solution. There are wonderful long-term solutions, but none of the larger players are interested in problem resolution yet, only posturing for personal advantage.
So, for now about the best we can hope for on this is to keep the worst of the marauders from becoming the deciders.

" stay in their homes"

Did they ever really actually own these homes or were they renting from the bank?

". I don't want to see people made homeless"

Homeless? compared to their current situation they can rent and live like kings in areas where owning is as much as 50% less than what it would cost to own the same house or condo. Their rent might be the same as their teaser payment or less. I've read copious amounts of articles about investors who rent homes out for less than their mortgage payments.

instead of freezes and bailouts the government should put all their efforts into investigating mortgage fraud and cleaning up the business so this doesn't happen anymore. they should start by making it law that you need to qualify at the reset rate and not the teaser rate. that's common sense and would have saved lots of trouble.

I think people will be better off selling now and taking a loss than staying in their home and selling for an even bigger loss 1-2 years from now.

The perpetual story portrayed in the media that people losing their homes is a bad thing is invalid.

If someone loses their home, they're not homeless. They're not bankrupt. They're not ruined. They're renters, and most likely they're renters with a lot more money in their pockets than they had when they were "owners".

People who are to lose their homes and the media need to recognize the real benefit this.

"They're renters, and most likely they're renters with a lot more money in their pockets than they had when they were "owners".

todays renters are the people who are saving cash and will be able to purchase homes in 2 or 3 years at the possible bottom. the more people who should be in that position but are in homes now they can't afford the longer this all lasts.

Regarding Countrywide, Brad Setser has suggested that the Chinese should buy it. That would make their subsidization of our increasingly weird debt situation all the more direct and obvious.

Thank You Dr.Baker for sharing us your insight and wisdom! Thank You for taking in my question in great detail to share us your knowledge!

The Plan isn't likely to stop the collapse of housing prices in the most bubblicious parts of the county. Prices will fall because, absent the exotic mortgage products, most people in those areas can't afford the inflated prices.

What this will mean is that banks and investors can keep the assets on the books at the inflated prices and that homebuyers will be trapped in these homes for years.

And for those of you who aren't tenants, you should know that many of the foreclosed can't rent most housing, as landlords check credit ratings and won't rent to those who have bad credit. In a story in our local paper last Sunday, two of the three foreclosed families rented from relatives. Those who suffer foreclosure can become homeless.

And I really want to develop a culture that uses the word "tenant" rather than "renter" in discussing those who rent our homes. When I rent cars or power tools, I'm a renter. In housing I suffer particular disabilities which should be recognized (eviction for any reason or no reason at all, short notice for price increases, lack of government subsidy, difficulty convincing my local government that I'm a citizen etc.). It was landlord groups that started using the word "renter" in the early 1980s to help them in their assault on tenants' rights to rent control and just cause eviction.

"I don't want to see people made homeless"

Who said anything about making them homeless? They'll just be houseless, like the rest of us renters.

Foreclosure is probably the best thing that could happen to well over half of them, since renting is so much cheaper than buying. It's also the best thing that could happen to the renters, since it'll bring prices down to where rational people can again consider buying houses.

Dean,

I'd like to invite your blog readers to visit our site at http://www.SwapRent.com and provide further comments. Thanks.