Pajama Journal


Faded-Flannel, Fluffy-Sock Journalism

January 18th, 2008 at 2:48 pm

Recklessly Stupid

When, during the Democratic debate in Vegas Tuesday night Hillary proposed her intention to freeze interest rates for five years, my comment was, “That is recklessly stupid.”

I didn’t put enough thought into it to analyze what made it so stupid. It was just gut knowledge, some basic but probably forgotten understanding of what makes financial markets work, and what breaks them. This morning I am pleased to discover that Fortune Magazine agrees.

Hillary’s modest proposal (to wreck the housing market)

The current mortgage mess requires a more intelligent approach than the buzzsaw plan floated by Hillary Clinton.

By Jon Birger, senior writer

(Fortune) — Hillary Clinton is no dummy. Even her detractors know that. And yet in last night’s Democratic presidential debate in Nevada, Clinton floated what is perhaps the dumbest solution to the current mortgage mess I’ve heard from a top presidential contender.

Back in the early Eighties I was selling Real Estate in NY. Mortgage interest rates were an insane 16 - 18% even up to 21% for commerical property, the good ones were adjustable in 5 years, the not so good - in as little as one year. The worst of them came with “balloons”, a clause that means after a preset period of time the bank would call the loan. These we could catagorize into bad and worse, bad being a 5 year balloon, worse being a 1 year balloon.

There was no government freeze, yet as anyone who was fortunate enough to own a home in the mid-eighties knows, rates came down - way, way down - and market values soared. People who were able to survive the hard times were rewarded with huge appreciation.

Take for example, my first house. I bought it for 30,000 in 84 as rates began to come down. My mortgage was a reasonable 1 year adjustable 13.75% interest rate. I sold two years later for 57,000. I was in a hurry you see, I’d been transfered and my company wanted me in Kentucky in 30 days. The man I sold that first little house to, paid cash and sold it two weeks later for 117,000. The next owners were there for only about a year, and sold it for 154,000. I lost track after that.

Then came the early 90’s, interest rates which had continued to decline began to rise again. No place close to what they had been, just a couple of percent if my memory serves me. Home values plummeted. This time I’d bought a home for 59,000. I think the interest rate was right around 10% and it was fixed, no balloons, no adjustables, an FHA loan. When I had financial problems, I was unable to sell the house. I might have been able to get 42,000 for it, based on a neighbor’s sale. I owed 58,650 - give or take - and so selling wasn’t an option. Eventually I lost the house, but not before FHA (Federal Housing Administration) did it’s damnedest to help me keep it - even giving me up to two years without payments to get back on my feet! What happened to FHA then, you might be wondering? The answer is, “nothing.” They are still there and there are new programs that will help people who are on the cusp of losing their homes.


This is not to say that additional programs to help folks who are in danger of foreclosure, especially those who are the victims of predatory lenders, are a bad idea. Hillary’s plan, and I use that word in the lightest possible way - surely nobody thought it out, doesn’t address predatory lending though. The only Democratic candidate that does address them is Obama; He doesn’t just have a plan, he has already introduced legislation.

Predatory lending could warrant it’s own post, which I will never get around to doing, so let me sum it up with saying this: It is the practice of charging people more of what they don’t have much of - once they are hooked, that is, with an endless variety of traps that those with few resources might easily fall into. For example:

  • Approved credit to people with poor credit ratings. This is often irresistible because it is the only option available, it is a bad vs. worse choice in many cases.
  • Low teaser rates that will allow people to borrow more than they can afford and therefore buy more house than they can afford. These gems come with negative amortizations at their worst and a risk of unaffordable future payments at their best.

Once hooked, the lender goes into ‘Gotcha Mode‘ and the borrower will find they are at the bottom of a very slippery slope.

Obama correctly asserts that these predatory lenders need more oversight and regulation. They do. And the issue is bigger than mortgages as he also pointed out. Credit card and pay day lenders also practice legal loansharking.

I have not heard either Clinton or Edwards (whose ideas are even dumber) address this issue. It’s a better political sound bite to say, “freeze rates - save the houses!” Sounds simple when you put it that way. And it is; simply stupid.

Predatory lenders need to be dealt with. People who fall behind or fall victim should (and do) have programs to turn to. Interest rates and the housing market will ebb and wane as they have done for decades, and as they should continue to do without disastrous artificial freezes.

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This entry was posted on Friday, January 18th, 2008 at 2:48 pm and is filed under Obama, Election 08, Debates, Clinton. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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