Blowback is the unintended consequences of an action, in this case is the government plan to have mortgage issuers voluntarily freeze rate for some ARM mortgage holders.
“I’ve never seen anything such as they’re suggesting here in my career,” said Lord Abbett’s Ezrati, who has worked in finance for 36 years. “It would be the equivalent of telling you the coupon [the interest rate] on a bond is being changed.”
Or like the government ‘persuading’ your bank to lower the interest rates on your saving account. Would you be likely to continue to bank there in the future? More probably, you would find a bank in another country if you could. The hot money that floats around the world looking for the best return won’t be coming to the US if the government makes their investments worth less.
This could mean higher interest rates with fewer lenders willing to lend. Which in tuurn would make homes harder, not easier, to get.
To me, it sounds more like negotiating on a bad debt: okay, I can’t pay you all the money, how about 50%? The creditor takes what they can get because some is better than none. Will they ever loan to you again? Give them a year or two, and you’ll be getting mailers from the same company for pre-approved credit cards.
At one time, a certain large American bank sent unsolicited credit cards to every account holder. 20% of the new account holders defaulted— but the bank made so much money on the rest that it kept up the practice until a law was passed against issuing unsolicited credit cards. Lending money at interest, though forbidden by the Bible, is a lucrative business.
And, as I’ve said before, the market will compensate. There’s a pool of private lenders who charge slightly higher rates who are always looking for new places to invest. If rates go up, new lenders will step in.
Only if rates go down does lending become unattractive– especially in a climate of rising inflation, when the income earned doesn’t replace the value lost. Yet that’s what the Fed is expected to do: drop interest rates some more. I’m sure that when credit dries up, people will blame the ARM rate freeze– but the Fed’s actions are heading us in that direction with or without a freeze.
Perhaps this is the blowback from 5 years of bad lending practices by greedy investors out for the big bucks. If they had used the same rules as banks, perhaps people would be in smaller more affordable homes instead of homes they can’t pay for. To the greedy investors – you took an gamble and lost – be happy you aren’t having to foreclose and pay $ especially as there is no one out there to buy that property for the return you want.