[Always Right]

So now the government has stepped in and said that, if you fall into a particular category of adjustable-rate mortgage (ARMs, in the biz) and you're worried that it's getting way too adjustable, don't worry: The Nanny State is about to readjust it well inside your comfort zone.

Doesn't anybody understand, this is what the banks wanted. This fix was not pushed on to them by the nanny state. The banks want to avoid foreclosures, and if they can do so and still get a decent albeit smaller return they will be tickled to death.

[Redbob]

"The banks want to avoid foreclosures, and if they can do so and still get a decent albeit smaller return they will be tickled to death."

That's a novel theory; can you support it?

[untrained skeptic]

I don't like seeing the government take a hand in negotiating reduced interest rates for mortgage holders, but I agree that this article is highly misleading if not outright wrong.

This was not done by the government to the banks, and it was narrow enough that I suspect that the government exerted very little influence over the banks, though they should have exerted none.

The banks are renegotiating these mortgages because it is in their own best interest to do so. They are only doing this for borrowers who will have to default on their mortgages if their rates rise, but are not already behind on their mortgages and would likely default even after the rates were frozen.

If people were already behind on their mortgages freezing the rate an an unfordable level doesn't solve the problem. The banks can deal with such situations on a case by case basis, but they are likely better off going ahead with the foreclosure even though that means taking a large loss.

If it appears borrowers can continue to pay their mortgages if the rates go up, even if it does stretch, their finances greatly, the banks have no incentive to give them an interest rate break either. They simply expect such people to live up to their obligations.

However, for those that are just able to keep paying their mortgages as they are now, there is an incentive for the bank to freeze the rate and accept the lower rate of return rather than force the home owner to default and then for the bank to lose a fortune through the foreclosure.

Those are the only people to whom the banks are offering this rate freeze, and they would have likely done so without any prodding from the government simply because it is in their own best interests.

[Bryan24]

“The banks want to avoid foreclosures, and if they can do so and still get a decent albeit smaller return they will be tickled to death.”

Uh, they’ve been collecting interest for 20 years on these sub-prime loans. They’ve already made a lot of money on the loan. If they foreclose, THEY WILL OWN THE HOUSE.

They could sell the house WELL BELOW market value and still make more out of it than if the loan reached full maturity and was paid off.