Subprime Mortgage Freeze Plan By Bush Could Lead To More Crisis

December 11th, 2007

It is to be seen whether the interest rate freeze idea on subprime mortgages will help the people in general or create a liquidity crunch.

In New Jersey, Lord Abbett & Co.’s senior economist and market strategist, Milton Ezrati said “When the government comes in and says you have contracted to have this arrangement and you can no longer have it, I think it opens the door for lawsuits”.

President Bush, along with Treasury Secretary Henry Paulson made an announcement that they had reached an agreement with lenders to freeze interest rates on a few mortgages for a period of five years. According to them, this deal will come as big help to people who may fall behind on their mortgage payments when interest rates reset and become higher all the way till July 2010. Investors who have invested in home-loan bonds, which is a $6.3 trillion market made up largely of loan pools which remit regular interest payments to its bond holders, may revisit their rationale for investing in these bonds due to the proposed freeze being talked about. This could possibly further result in a serious liquidity crunch situation.

People in the U.S. bond industry have not taken too kindly to this new proposal, and over U.S. President George W. Bush’s attempts at freezing interest rates of house mortgages to stop the flow of foreclosures. Analysts say that there will be hardly any positive impact of this move towards stemming the level of foreclosures.

At RBS Greenwich Capital Markets managing director of fixed- income strategy Kenneth Hackel said that “It could end up there’s less confidence in the viability in the bond markets and the mortgage markets going forward and it could lead to higher interest rates and higher mortgage rates for everybody”. He also added that he had been getting many calls from clients who were “pounding the tables and beating the drums”.

Lord Abbett’s Mr. Ezrati, with over 36 years of experience in finance, said “I’ve never seen anything such as they’re suggesting here in my career”.

There have been losses of over $66 billion due to foreclosures and mortgage based securities along with leveraged loans by global banks. It was estimated by Goldman Sachs Group Inc. last month that there may be losses of up to $726 billion in global credit markets.

Analyst’s have added that President Bush’s proposed plan could also shake people’s confidence in the real estate market while being little help to borrowers.