The Associated Press, citing congressional aides who spoke on condition of anonymity, said that the Bush administration has made an agreement with the lending industry to freeze interest rates on certain subprime mortgages for up to five years in order to combat foreclosures. This comes after a debate that included proposals to freeze the rate for up to seven years as well as proposals to freeze it no more than one to two years, if at all.
One source familiar with the situation said that the interest rate freeze would apply to loans made between January 1, 2005 and July 30 of this year. The rates would adjust and begin to rise again between January 1, 2008 and July 31, 2010.
President Bush is set to speak formally on the agreement at the White House on Thursday. The Treasury Department said that Treasury Secretary Henry Paulson and HUD Development Secretary Alphonso Jackson would hold a joint news conference Thursday afternoon with officials of the mortgage industry.
The problem with this plan is that it just delays the inevitable. It also dumps the problem on the laps of future politicians, other elected officials and CEOs who will surely have a new set of problems to deal with at that time.
Some may argue that it gives time to those borrowers affected by the plan time to restructure their finances and perhaps turn things around by the time the rate adjusts. But will it really?
In their article, AP used an example of a person struggling to make a $1200 payment who is facing an increase of $350 once the rate resets. That's an increase of 29 percent. You really think that one to two years will allow that person to afford a 29 percent increase in their mortgage payment? Have we forgotten about rising gas and energy prices? Have we forgotten about inflation and other factors?
When you look at the reality of it, it's highly unlikely that this person will be able to avoid foreclosure just by delaying their rate increase for a short while. Once the rate freeze "melts", they will be facing the same situation they are now. To make matters worse, they will be even more demoralized then than they are now because the plan they thought would help them in fact, did not.
There are ways to address the situation many are facing, but a mortgage interest rate-freeze is just a temporary band-aid on a severed artery. The Bush mortgage interest rate freeze plan doesn't face the reality of the situation nor is it a solution.