Thursday, December 6, 2007

Freezing mortgage interest rates: net positive

Here are two excellent pieces on the subprime crisis about the government's plan to freeze interest rates on some subprime loans to prevent foreclosures.

In addition to helping borrowers (homeowners) keep their homes (since their be able to make their payments), the rate freeze will help investors in mortgage securities. In the short term, the rate freeze won't affect the coupon payments of their bonds (since those were never going to go up). In the long term, while the collateral pools may run out of cash flows to pay the coupons, the expected principal write-downs will be far lower.

Overall, while this fix will only affect a fraction of homeowners and investors, it will likely have a net positive effect.

It does, however, raise a few eyebrows when the ex-Goldman Sachs treasury secretary calls for rates to be halted just after Goldman Sachs announces not write-downs in the third quarter but begins to look skittish about fourth quarter write-downs, which may be halted by the freeze.

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