Clearing up one point about subprime "teaser" rates
Nick over at punny money is ranting and raving (rightly so) about the proposed plan by Paulson and Bush Co to freeze subprime "teaser" rates.
I'd like to clear up one of the biggest misconception of this whole subprime mess and that is these less than stellar borrowers were getting ridiculously low interest rates (below 5%). That's quite false, most of these borrowers were getting rates in the 7-8%. Even prime loans aren't at that high right now with the rise in interest rates (conforming at least, no idea about Jumbo). So yes, these subprime borrowers started at a higher rate than most and they were going to reset higher (9-10%) but now they get to keep that rate.
Now, I'm not trying to say that we as citizens shouldn't be outraged by what kind of precedence this sets up, and Nick mentioned many reasons why he is outraged.
If the government can come in and change the terms of a contract, what does that mean for credit cards? Will they come in and say everyone that has a large balance was deceived and should now only pay 3% instead of their default rate of 29%? Oh, and by the way, everyone who pays their balance on time, you get nothing.
Does that mean that I should start running up a large balance instead of being responsible with my credit cards because the government will now decide that I was "deceived" into getting my credit card? Have these people ever heard of moral hazard, I already mentioned that already and this plan seems to be the very definition of moral hazard.
12:08 PM
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1 comments:
While I don't disagree with the moral hazard argument, it's a bit like the old saw about when you owe the bank a million, you have a problem, but when you owe the bank a billion, the bank has a problem.
The issue in this case isn't the individuals with the financial problems, or the institutions who loaned them money. The problem is that the sub-prime crisis can spill over into the general economy, at which point everybody suffers. I wouldn't advocate risking a depression just to teach a few individuals a lesson.
Personally, I don't mind gov action, but only in as much as is necessary to shield the general economy from the subprime mess, but no more.
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