Interest Only Loans Have to be Made Illegal

U.S. Treasury Secretary Henry Paulson is trying to mitigate the effects of the housing bubble collapse.

In an interview, Mr. Paulson said the number of potential home-loan defaults "will be significantly bigger" in 2008 than in 2007. He said he is "aggressively encouraging" the mortgage-service industry -- which collects loan payments from borrowers -- to develop criteria that would enable large groups of borrowers who might default on their payments to qualify for loans with better terms.

That's a shift from his previous view that the problems didn't warrant a group approach. Mr. Paulson said his outlook has evolved as he has learned more about the problem.

This was the largest and most urgent financial issue facing the country when Mr. Paulson took office. This leaves me with the impression that he's just started learning about it, which is consistent with the Treasury's behavior.

Reading the article and the interview excerpts, in which Mr. Paulson states "[we need] to have as many [homeowners] as possible be able to stay in their homes" really alarms me. On the one hand, he wants to fix interest rates. This screws people who more prudently got fixed rates, but prudence is going to be punished in any bailout. On the other, he's made leaving people in their homes the goal, with an intent to keep them paying the same. And, he's including 'homeowners' with no-money-down interest-only loans in the mix.

Do you see where this is going? Mr. Paulson is going to suggest to lenders that they delay the balloon payment, and that they maintain the interest-only nature of the loan forever. This creates a situation where people are essentially paying very high rents to a completely unaccountable landlord -- the banks don't have any obligation to fix the plumbing, but keep raking in that income forever. The 30-year mortgage will become rent ad infinitum.

Congress has got to act to stop this. Mr. Paulson is trying to save the investment banks by letting them continue to drink the blood of the poor. Maybe I'll draft a letter.

And, reading the housing bubble blog, I saw this:

Just how did all these Wall Street bankers in their $5,000 John Lobb shoes manage to step in you-know-what?
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Investors piled into savings and loan stocks in August. Back then they looked like a safe haven from the subprime mess
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[L]arge thrifts who sell mortgages to investors took some of the biggest losses. They had to write down some of the mortgages on their books when they couldn’t sell the loans.
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The Office of Thrift Supervision reported today that earnings for the nation’s savings and loans plunged 84 percent in the third quarter.

Seriously, are these people stupid? I try to stay away from that sort of invective, but come on. You're going to hide from the housing bubble collapse in thrifts?