Some analysts were complaining that the Treasury Department/Hope Now Consortium plan to fix some mortgages at “teaser rates” – as a way to stall the foreclosure wave – was nothing more than delaying the pain. This may be true, and the fact that mortgage backed securities investors seemed to be missing during all the planning (and press releases) meant something eerie was afoot. Judgment day has now come, and numerous borrowers are going to get government sanctioned rate freezes that fly in the face of several hundred years of contract law. With the Treasury Department noting this is “not a government subsidy” and that potential lawsuits will be “manageable,” I can’t help but think individual investors are about to get clubbed from behind.
It’s pretty clear the quality of the loans diminishes if they are subject to rate co-opting (which is exactly what is happening here). Investors should hope that Standard & Poors does the right thing and follows through with their threat to downgrade such paper. It will serve two valuable purposes: state and local government funds will be precluded from investing, and everyone else can demand significant discounts to carry what can turn to junk whenever the political winds blow.
UPDATE: Nouriel Roubini has attempted to portray the positive aspects of the blanket bailout in what Paul Kedrosky called a “lucid” analysis. I’m inclined to categorize the take as a condescending, wholesale endorsement of socializing losses.