Even as mortgage conditions worsened, comments from top policy makers made it clear that a full-scale bailout isn’t in the cards. The best relief in sight came in the form of a downward turn in interest rates. 

Here’s what the government had to say:

• President Bush and Treasury Secretary Henry Paulson called some Congressional bailout plans an inappropriate use of taxpayer dollars. 
• Federal Reserve Chairman Ben Bernanke asked lenders to forgive some portion of borrowers’ debts.

Here’s what housing statistics had to say:

• The mortgage foreclosure rate reached a record high
• Home equity levels fell to an all-time low

And finally, here’s how interest rates may help:

•  After rising steadily over the previous five weeks, thirty-year mortgage rates took a step back and fell to 6.03% as of March 6th.

Yes, We Have No Rabbits

Back in the 1970s, when President Gerald Ford refused to bail New York City out of its debt crisis, one of the New York tabloids famously printed the headline: “Ford to City: Drop Dead.” During the current mortgage crisis, the responses of some leaders and policy makers may seem similarly heartless, but the fact is their hands are tied. With a sizeable budget deficit and a weakening economy, the government’s financial resources are limited. In any case, a mortgage bailout would be questionable public policy. Should the vast majority of Americans who have paid their debts also have to pay the debts of mortgage borrowers facing foreclosure? What does that say to the homeowner who took on an extra job or cut expenses in order to stay out of this kind of trouble? And how would a bailout encourage responsible borrowing and lending practices in the future?

By the way, New York City survived without help from the federal government, and so will most mortgage holders.

In effect, Federal Reserve Chairman Ben Bernanke confirmed the limits of the government’s power to help when he asked lenders to write down a portion of borrower’s principal. Certainly, it is in the interest of lenders to work with troubled borrowers within reason, but they are in no more of a position to foot the bill for a massive bailout than the government. Like the government, these lenders have their own financial troubles, and also have to worry about what this would mean in the future. Any bailout now would just make subsequent mortgages more expensive, as lenders would be forced to build in more of a risk cushion.

In short, neither the government nor lenders have any rabbits to pull out of a hat.  

A Survival Plan for Borrowers

Even so, there is a survival plan borrowers can follow. Lower interest rates increase refinancing opportunities. Even if a poor credit rating makes getting a new loan difficult, borrowers may find their current lenders willing to listen, since they have an incentive to work things out. Borrowers just need to understand they shouldn’t expect a miracle. They’d be better off using a mortgage calculator to figure out a payment plan they can afford, and going to their lenders with a specific proposal. A realistic course of action that takes the needs and limitations of both sides into consideration is likely to get a better reception than a request for a bailout.

Tags: borrowers, interest rates, mortgage, refinancing

This entry was posted on Thursday, March 6th, 2008 at 12:20 pm and is filed under Weekly Wrap-Up. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.