Paulsen, our treasury secretary, has been pushing for a voluntary cutting of slack, for hard pressed home owners. In a burst of stupidity, banks began to issue teaser rate sub prime mortgages. The home owner got a couple of years of mortgage payments that he might be just barely able to pay. That's what makes it sub prime, the borrower doesn't really have enough income to carry the mortgage. Two years into this deal, the mortgage payments go up, a lot, the mortgage is "reset" to "market interest rates". About a million borrowers are looking right down the barrel of foreclosure when this happens.
One million forclosures is bad news for the lenders, the home owners, the neighbors, and the local tax base. The lenders loose half their money, the home owners are out in the street, the neighbors property values take a big hit, and the foreclosed property doesn't pay taxes.
The lenders take a real short haircut. If the property were salable, the owners would sell it rather than turn it over to the bank. The property that falls into the hands of the bank is the property that won't sell. If the owners can't sell it, the bank can't either. Usually the property is auctioned off and the lenders recover about half of what they lent out.
The lenders are better off if the homeowner keeps paying on the mortgage. With that in mind, Paulsen has been urging the banks to give the homeowner's some slack, namely holding the teaser rates for another five years. Sounds like a win-win to me. Bank avoids the losses from foreclosure, the homeowner gets to stay in the house. Plus I have heard the "teaser" rates were hefty to start with and the "market rate" to which the loan reset was high enough to class as usury.
For some reason, the Wall St Journal is against this plan. Two editorials have spoken against it, although the reasoning is unclear. WSJ has been nattering about "sacredness of contracts" and "let market forces prevail" but these are sound bites, not serious reasons. The lenders will be better off accepting a lower but still hefty "teaser" interest rate than losing half their capital in a foreclosure.