Personal Finance Advice

In an effort to stave off another wave of foreclosures the government is putting together a plan along with the lending industry that would temporarily freeze mortgage rates.  Many adjustable rate mortgages or ARMs were set to adjust to higher rates at the beginning of next year.  With the economy already reeling from the losses of large financial institutions, this is welcome news indeed.

U.S. Treasury Secretary Henry Paulson is expected to announce the outlines of the plan sometime this week.  The government has been much criticized for being slow to react to a growing crisis that has been building for the past year.  What started as a slowing in the housing market has now ballooned to the point where the general economy is at risk.

Perhaps it took the stock market’s largest one month loss in five years to finally get them to act.  Although little is known at this point, the plan is already receiving criticism from both sides of the equation.

Homeowners groups are worried that it’s too little too late and that it won’t help those who are most in need.  From Paulson’s statements, the plan would do little to provide relief for those who are in default or already behind in their payments. 

Investors in mortgage backed securities are worried at what a general freeze in rates would do to their returns.  They feel that loans should be reviewed on a case by case basis.  Although at this point one would think they would be happy to get any kind of return at all after what has already transpired.

What we don’t know yet is how long this “temporary” freeze is supposed to last.  It really does nothing for the fundamental flaws in the lending industry.  So at best, this only a band aid to the problem that will only delay the inevitable.

What I believe is truly needed is a comprehensive plan to pretty much get rid of ARM’s all together and allow homeowners to refinance into affordable fixed rate mortgages. It would be expensive and I doubt that it is something that would even be contemplated until the economy is much worse off.  Basically give it a year or two.