According to CNN, FDIC chairman Sheila Bair is suggesting that adjustable mortgage rates be frozen to prevent more foreclosures.
“Keep it at the starter rate. Convert it into a fixed rate. Make it permanent. And get on with it,” Federal Deposit Insurance Corp. Chairman Sheila Bair said in prepared remarks at an investor’s conference.
Adjustable rate mortgages involve a lot of risk, both to the borrow and investors. The idea is that the initial rate is lower than a comparable fixed rate mortgage, and any increase in interest rates would result in a rate increase of the ARM, offsetting the risk of making the initial mortgage. They seemed like a good idea at the time since fed rates were low, and they may have been a good borrowing option for short term borrowers, home flippers, of borrowers oblivious to the fact that rates may rise one day in the near future. By freezing the adjustable rate, this essentially rewards the borrowers by giving them a ‘get out of jail free’ card and preventing them from facing future rate increases. This also undermines the sound financial decisions that millions of people have made; the decision to NOT take on a risky loan that you’re not sure you can afford in the future.
Actions like this would send the message that it’s OK to get in over your head financially. Along with many other bailout ideas being thrown around, this does nothing to discourage anyone (lenders, borrowers, investors, etc.) from making these same mistakes in the future. It’s just like gambling where if you win, you get to keep your earnings, but if you lose then you don’t have to pay.