Government to the Rescue
The government has stepped in with a plan to freeze certain ARMs for 5 years. The DOW responded with a gain of 175 points and the gains were felt across the market. The decision of the government to step in is a big one, and especially strange for a Republican president to take. As far as free markets are concerned, the decision of the government to step in and bail out people who took out bad loans to buy homes, and now are in danger of losing them and sending the country into a recession, is a big one. Of course, losing one’s home is a terrible thing, but when the government steps in, a dangerous precedent is set.
One would hope that in the future, the government will be more proactive and create laws in advance to keep bad mortgages and loans from being packaged in the first place. Borrowers also need to be more aware of what they are getting involved in before signing anything.
According to an article on thestreet.com:
Under the plan, devised by mortgage industry leaders led by Treasury Secretary Henry Paulson, the government will assist struggling homeowners by helping them either refinance their existing loans, moving into loans backed by the Federal Housing Administration, or by freezing adjustable-rate mortgage interest rates for certain borrowers for five years, Bush said during a briefing.
Not everyone will benefit from the strong hand of the government, as it is not designed to help out speculators responsible for ‘flipping’ houses, lenders, and “those who made the reckless decision to buy a home they knew they could never afford,” according to Bush.
One thing is sure, the markets responded well to the news, with financial service companies like Lehman Bros, Bear Stearns, and homebuilders such as Lennar, and Hovnanian posting huge gains on the news. Whether the upsurge represents a sea change in the market, or is just reactionary remains to be seen.
