The NYT editorialized today against some of the bailout schemes that Treasury Secretary Henry Paulson and others are trying to cook up. It then endorsed a proposal from the Federal Deposit Insurance Corporation to freeze resetting mortgages at their introductory rates, which it asserts are "typically 7 percent or 8 percent." This is an interesting idea (not as good my own to rent scheme), but please let's get in touch with reality. The fixed rate on prime mortgages was less than 6 percent three years ago, when the mortgages currently resetting were issued. Toss in two additional percentage points for the subprime premium and these borrowers would have been looking at interest rates of less than 8 percent on fixed rate mortgages. They snapped up adjustable rate mortgages because they offered substantially lower interest rates. The introductory rates on the mortgage now resetting were more likely in the range of 2 percent or 3 percent, not the 7-8 percent range claimed by the NYT. This means that leaving the rate at the introductory level would involve a substantial subsidy to the borrowers at the expense of the lenders. That may be warranted, but the NYT should at least give readers a clear idea of the effects of the policy it is advocating.
--Dean Baker [Put this one in the "never mind" category. A (below) is right. I rechecked the data and a substantial portion of subprime loans did have initial rates in the 7-8 percent range.]
