PIMCO on rate freeze: “Reeks of moral hazard” ... “pure politics”

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Good morning. Reaction and commentary about the sub-prime rate freeze plan:

--The Institutional Risk Analyst warns, ‘bank shareholders and loan investors will take a bath, credit available for housing will disappear, and at least one in three sub-prime borrowers will eventually default anyway.’ Quoting one of its readers commenting on the plan by Treasury Secretary Henry Paulson (pictured), the IRA continues, ‘The Paulson proposal will paralyze the U.S. housing market for years. Who in their right mind will lend money for home ownership ever again if the contract can become null and void the second the hoi polloi start screaming to their elected officials? ... If this continues, the U.S. is going to be just like Japan in the ‘90s.’

--Mark Kiesel, a senior manager at the bond fund PIMCO,
criticized the plan as short-sighted and said U.S. home prices may not hit bottom until 2010. ‘This reeks of moral hazard,’ Kiesel said. ‘This is pure politics as we enter an election year, and it’s not going to help the problem. It’s going to prolong the bubble.’

--U.S. Rep Barney Frank, quoted by Bloomberg News: ‘There are a couple of problems with it,’’ Frank said. He particularly objected to rules favoring borrowers who have FICO scores of 660 or under: It’s a ‘grave error that there’s a cutoff at a 660 FICO score,’’ he said. That penalizes those who struggled to maintain good credit profiles, he said. Frank also faulted the plan for failing to address the penalty for prepaying many sub-prime mortgages.

Photo Credit: Bloomberg News
Hat tip: TW for IRA item, Cal and Dav for correcting the 660 FICO information.