Government to the rescue?

The Bush administration on Thursday finally came through on its long-promised desire to help the escalating number of homeowners across the country who are facing foreclosure.

The question now? Is the Bush plan a good one?

Here’s my thought: It’ll certainly help a select number of homeowners facing a huge jump in thier monthly mortgage payments as their adjustable rate mortgages jump from a lower “teaser” rate to a far higher “normal” rate. But what the Bush plan won’t do is prevent additional homeowners from getting into the same situation themselves. To be fair, there probably isn’t much the government can do — aside from what most people would consider far too much regulation of the private mortgage-lending business — to protect homebuyers from making poor borrowing decisions.

Under the Bush administration’s plan, financial institutions have agreed to a five-year freeze on interest rates for certain  homeowners who face default on their subprime mortgages. It’s a major concession from lenders and other financial institutions. But it’s also important to remember that this agreement only applies to a fairly limited number of homeowners: Only those with subprime mortgages who are current with tier teaser-rate payments and won’t be able to afford the higher interest rates when their loans adjust.

Basically, the agreement would allow these homeowners to pay their initial lower interest rate for the next five years, even if that rate was originally supposed to adjust higher during this period. According to a report in yesterday’s Chicago Tribune, more than 1 million of such loans are scheduled to be reset over the next year.

So, yes, this probably is a necessary move. But how does the government guarantee that another million-plus homeowners don’t fall into the same mortgage trap in the next year? How does the government prevent buyers from taking out mortgage loans that they won’t be able to afford once they adjust from a lower interest rate to a higher one?

The answer is that the government can’t. It’s human nature, unfortunately, for buyers to want the house that’s just a litte bigger, a little newer or a little nicer than the one they can actually afford. The only way, often, for them to get into that nicer home is to go with an adjustable-rate mortgage that provides them with an artificially low interest rate for three or five years.

So unless the Bush administration figures out a way to change human nature, the best we can hope for are bail-out plans.