Will Mortgage Plan Save the Day?
With the a new wave of foreclosures about to hit an already beleaguered financial system, the Bush Administration and the mortgage industry decided to finally act. CNN reports that the plan would call for a five year moratorium on introductory “teaser” rates.
How will this affect the stock market?
This should be welcome news for investors. Financial stocks helped drive the market down last month in what many suspected was a prelude to an economic recession. While investors should still be wary, it appears that the worst may be over for now.
How will this affect the financial sector?
Credit markets will still be tight for awhile but this plan along with another expected cut in interest rates will give financial institutions a little wiggle room. They will be hard pressed to recover their previous levels of liquidity with the lack of demand for securitized debt. This will give them the time they need to regain the confidence of investors, who aren’t too happy right now seeing as their returns are being cut due to the rate freeze.
How will this affect homeowners?
It will help some but not the ones who need help the most. The plan does nothing for those that are already in default or are behind on payments. For those it will help it will give them time to hopefully refinance into a fixed mortgage once the credit markets aren’t as tight.
How will this affect the economy?
There is no question that many people thought the economy was teetering on the brink of a recession. Another shock to the financial system might have been the final straw. While it’s possible that this plan is only delaying the inevitable, it does gives time for the fundamental problem to perhaps correct itself.
How will this affect the housing market?
Here we come to the crux of the matter. It was the slump in the housing market the began this whole mess. Well, that and poor lending standards. This plan will help forestall another wave of foreclosed homes on a market that was already over supplied to begin with.
This is where the time length of the freeze becomes important because many analysts expect the housing market to remain soft for the next couple of years. Hopefully by the time the moratorium is set to expire, the housing market will have recovered to the point where it no longer serves as a drag on the banking system and the rest of the economy.
