A rate freeze: Only the beginning

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I thought I’d take one more whack at the rate freeze. This is big stuff -- a federal government effort to manage an unmanageable business and economic problem. Why unmanageable? Because bubbles end badly. You can look it up. First, links:

Calculated Risk’s ‘Ten Things to Know About the Rate Freeze’ is a good place to start. Number 7: ‘These are not teaser rates. ... The freeze rate is usually in the 7% to 8% range. Some people hear ‘teaser rate’ and think 1% or 3%. Nah. These loans started at a much higher rate.’ Number 5: ‘The plan targets homeowners with weak credit who owe more than their house is worth. This is plan is for homeowners with weak credit (maybe 1.2 to 1.8 million) that are underwater - or about to be underwater - on their homes. They can’t sell. They can’t refinance. And they probably can’t make the new payment.’

I always find Lou Barnes’ commentaries interesting and sharp-elbowed. His take is that the rate freeze is mostly a waste of time -- its economic impact will be ‘undectable,’ Barnes writes, because upside-down homeowners cannot be saved. ‘No hope for these homes,’ he writes. Barnes has been pushing an aggressive government intervention for a while now. Rewrite the loans to reduce the profit margins and erase the resets, he says.

Barnes: ‘A shriek from the Right and The Street; ‘You can’t re-write existing contracts! You’ll damage the market!!’ The hell we can’t. We do not respect the contracts of loan sharks -- by definition, terms that a borrower cannot meet. If your idea of a market for mortgage-backed securities is the back-alley knee-capping of three million households, we have every right to alter your ‘terms.’’

‘Loan sharks?’ ‘Knee-capping?’ Wow. That last bit of anti-corporate rhetoric is worth noting -- remember, this is a political issue in an election year, and politicians are still searching for the narrative they will use to explain and defend their policy proposals. Against that background, lender-bashing is on the rise. The LATimes’ Tom Petruno writes that economist Ed Yardeni ... ‘may echo many Americans’ views when he asserts, perhaps only partly tongue-in-cheek, that lenders who made sub-prime loans under the terms targeted by the rescue plan ‘should be charged with usury, arrested and thrown into lenders prison.’

My take: the lender-bashing will increase, as will government efforts to help recent borrowers -- both buyers and refinancers -- stay in their homes. Last week’s rate freeze will eventually be remembered as the first of several big government attempts to keep some air in the housing bubble.

Your thoughts? Comments? Email story tips to peter.viles@latimes.com.