Bush Administration's Subprime Solution - Is it Legal? Is it Right?

Secretary Paulson has been working on a number of fronts to address the credit mess triggered by excesses in the subprime market. My current concern is the plan to put a hold on foreclosures and to freeze subprime teaser rates - for as much as 5 years.

If the holders of a mortgage want to voluntarily work out new terms with the homeowner that is fine. I've seen some pundits that have argued that it is in the best fiduciary interest for the mortgage companies to "work out" a deal that will keep people in the homes rather than foreclose. If in fact it is in the best financial interest of the mortgage holder to make a new arrangement then I'm sure they will.

But I don't see how the government can mandate, or legislate, a freeze on interest rates. The government can not override a private legal contract between two independent parties. This would constitute an illegal seizure of property.

There is the added difficulty of how the many individuals risking foreclosure will be classified as being eligible or ineligible for the freeze on interest rates. The tort lawyers are licking their chops. Class action lawsuits are probably already being drawn up.

Individuals and mortgage companies entered into a contract. Loans were made to people that couldn't really afford a house and both the holders of the loans and the people living in the homes will be hurt. But the government muddling around trying to centrally orchestrate a "solution" will only make things worse. The "market" has the capacity to work this out without the government mounting a Katrinaesque "rescue" operation.

What is equally disappointing is the rhetoric from Hillary Clinton and others on the left that Wall Street is to blame for the mess and must be held accountable. In fact, the many securitizations that Wall Street firms packaged, provided large amounts of liquidity to the mortgage market, helping many people become homeowners who would not have been otherwise.

For years the Democrats railed against the mortgage industry about needing to be more aggressive in providing mortgages to lower income families. When they finally did the results speak for themselves.

Interestingly, housing prices recovering from the excesses of Greenspan liquidity, will make homes more affordable for a greater number of Americans.