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Globe Editorial

Imperfect deal on mortgages

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December 7, 2007

TO HELP some overburdened homeowners avoid foreclosure, President Bush yesterday announced a five-year freeze on interest rates for certain types of adjustable rate mortgages. Amid a spiraling credit crisis sparked by the meltdown of the high-risk mortgage sector, the US Treasury negotiated an agreement with lenders and securities investors. The basic deal would maintain the initial "teaser" rates on adjustable-rate mortgages for now, rather than letting them reset upward.

While the deal should help, some caveats are in order. It will ease the way for subprime mortgage holders with the best chance of keeping their homes, but it will not make the broader financial crisis go away. And it is still unclear whether investors in securities based on risky mortgages will go along.

Investors aren't being asked to bear an unreasonable burden. At an event Monday sponsored by the public policy group MassINC, Eric Rosengrin, president of the Federal Reserve Bank of Boston, pointed out that the initial teaser rates on subprime loans are hardly low; the two-year teaser rate for one type of subprime mortgage in 2006 was a stiff 8.5 percent. Those rates will reset to upward of 11 percent - at a time when falling home prices make it hard for people to refinance.

But investors who bought securities based on mortgages with two-year teaser rates were never counting on homeowners to pay exorbitant rates for 28 years. Of the two-year teaser mortgages written in New England in 2004, 93 percent were retired within three years, the Fed's data indicate.

A five-year freeze would allow more time for the housing market to recover and beleaguered borrowers to refinance. This ought to appeal to the financial services industry's collective self-interest: If investors make the right concessions, they might get more of their money back than if nonperforming loans go into foreclosure. And if the mortgage industry doesn't want housing values to plunge, it should do what it can to keep hundreds of thousands of seized homes from entering the market at rock-bottom prices.

Foreclosures are spiking. The Warren Group, a real estate data company, reported Monday that there were 6,324 foreclosure deeds in Massachusetts in the first 10 months of 2007 - three times as many as 2006.

The subprime mortgage debacle represents one of the greatest failures of US financial regulation. Investors bought securities based on high-risk mortgages that, at best, stretched buyers' ability to repay. Yesterday, President Bush was quick to note that the government was not saving people from their own bad decisions. At this point, though, the health of a fragile economy depends upon whether the administration and the Fed can engineer a careful resolution to the subprime mess. Yesterday's deal is at least a start.

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