It seems the idea of “freezing” interest rates will be implemented after all, despite its flaws and the fact that it will only help a small number of borrowers. Perhaps top economists are spooked, but why do something that is certain to fail? Even Countrywide’s Mozilo noticed how bad the idea is. He said the better solution would be to raise the conforming loan limits and to allow Fannie Mae and Freddie Mac to keep more loans on their books – an idea rejected by the Bush administration recently. There may be some conflict of interest on Mozilo’s part, but his arguments are reasonable. Freezing interest rates will help some homeowners, but it will hurt lenders and investors, and leave the rest of the borrowers to struggle with increasing mortgage payments. He also noted that the industry needs clear lending standards that will create a sense of certainty and lure investors back into the housing sector, pumping liquidity and spurring mortgage lending (Bingo! But maybe we should leave the conforming loan limits alone, cos they’re pretty high right now anyway).
The worst may not be over yet for the mortgage industry: Banc of America and Fannie Mae both predicted significant home price drops in 2008. Fixing the interest rate on a small portion of mortgages will not prevent foreclosures, especially with borrowers willing to walk away from their “upside down” mortgages.
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