Debt Free

Could the Federal government take the step of actually freezing mortgage interest rates? James Lockhart, speaking on CNBC television said “I think we're going to let the market work and interest rates have come down dramatically and people are going to be able to refinance…” in Washington DC yesterday. He also stated that “Fannie and Freddie are doing billions and billions a month refinancing people out of subprime mortgages and I think that is the way to go” But, thankfully he also said he feels it would be a bad idea for the government to actually step in and freeze mortgage interest rates.

Who’s James Lockhart, and why should you care? Lockhart is the head of the Office of Federal Housing Enterprise Oversight, or OFHEO, another one of the seemingly endless number of government alphabet agencies entrusted with ensuring your well being. The statements uttered by Lockhart yesterday gave insight to how some on the hill would handle the credit industry problem, if left to their own devices; more government intervention, as we saw recently in California.

Freezing wages, prices or any other monetary attribute is always a bad idea. Historically it has never worked, and there’s no reason to think this would buck that trend. If mortgage lenders are restricted in the interest rates they can charge it will make the problem worse, and here’s why:

The problem now isn’t that mortgage interest rates are too high. It’s that many well qualified buyers are being left out in the cold when it comes to getting a mortgage, due to very tight lending policies. Lenders don’t feel like they are getting enough return to justify the risk from any but the most ‘A’ rated borrowers. Freezing the allowable mortgage interest rate will only exacerbate the problem. Telling investors that they can’t get the return on their investment they feel is warranted to justify the perceived risk will only cause them to invest else where. You’ll get capital flight from mortgage loans to other investments.

With less capital available for mortgage lending, there will be even fewer available mortgages, leaving even more willing (many with very good credit) home buyers out in the cold than there are now. As fewer home buyers can get mortgages, people will not be able to sell their existing homes to buy new ones. This will mean that home builders will be sitting on inventory, and paying carrying costs. The combination of unsold new home inventories (creating a lack of revenue) and carrying costs will cause even more problems in the nation’s home builders, and they will lay off additional employees. In addition, the small business owners that are the subcontractors for these builders will be forced to lay off employees or go out of business entirely.

Once again artificial fiscal controls will have exactly the opposite consequences than what was intended. Government meddling to control private markets will almost always conspire to limit supply, and make the situation worse. The mortgage interest situation would not be any different.

Have a great, Debt Free weekend!