I think at this point it’s generally agreed that one of the primary reasons why home prices are so high in the Bay State is because low interest rates have enabled buyers to bid up the price of homes to unnaturally high levels. Many of these buyers have been borrowing using variable interest mortgages, mortgages they cannot pay now that interest rates are rising.

Standard economics would dictate that as these buyers lose their homes, the housing bubble in Massachusetts would be pricked, and prices would therefore deflate to a more normal level. Furthermore, these buyers and the banks who lent to them, would learn a lesson in taking undue risk, thus making future bubbles less likely.

But OH NO… NOT HERE IN MASSACHUSETTS. Here we love inflated prices and moral hazard:

Massachusetts officials today are expected to unveil a $250 million fund to help delinquent borrowers of subprime mortgages refinance into more affordable loans to prevent them from losing their homes to foreclosure.[...]

The program will allow only those subprime mortgage borrowers who are 60 or fewer days behind on their monthly payments to refinance into 30-year loans at fixed rates of about 7.75 percent. The money should be enough to refinance loans for about 1,000 delinquent borrowers statewide.

Financial regulators blame the rise in foreclosure actions against Massachusetts homeowners on the proliferation of subprime mortgages used during the state’s housing boom.

Such loans were targeted at people with less-than-stellar credit and typically offered low “teaser” interest rates that made them manageable in the first two years, but then spiked up to levels many homeowners could not afford.

Perhaps the most disputed element of the Massachusetts plan is state officials’ insistence on forcing lenders to accept losses on loans when the value of the properties has dropped since the loans were first made, which is common in the current real estate downturn.

For example, if a subprime borrower purchased a home with a $250,000 mortgage and that property is now worth $230,000, MassHousing would offer $230,000 to the subprime borrower in a refinancing. The lender, to accept, would take a $20,000 loss.

That’s an easy out for lenders. Take a $20k loss instead of a much bigger loss in a foreclosure. Boy are our legislators boneheads. They are essentially giving out insurance payouts to lenders who paid no premium. We, the taxpayers pay the premium. And anyone looking to buy a house will pay the price, an inflated one on the value of their home.

Nice work guys.

Read the whole thing here.

(via Reason)

Previously: Tax Breaks For Mortgage Delinquents and Bailout.

This entry was posted on Thursday, July 12th, 2007 at 9:11 am and is filed under News & Politics. 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.