 So the FDIC Chairman is advocating freezing ARM rates for mortgage borrowers who are in trouble? Wow… I have to say I have very mixed feelings about this proposition. Especially since the percentage of mortgage borrowers in trouble is very small compared to the mortgage spectrum across the nation. What signal are we sending to lenders and borrowers if we travel down this road?
“Keep it at the starter rate. Convert it into a fixed rate. Make it permanent. And get on with it,” Federal Deposit Insurance Corp. Chairman Sheila Bair said in prepared remarks at an investor’s conference.
  In many ways that does not seem fair at all to millions of homeowners and mortgage holders that prudently shopped for their loan and took out more appropriate loan terms, most likely with higher interest rates. For example, let’s say borrower #1 found a really big house for $450,000 (that they shouldn’t have been purchasing), and took out an ARM with a low teaser rate for 1-3 years. Now they’re in trouble making payments. Borrower #2 bought a house at the same time, but realized they couldn’t afford such a large mortgage, and didn’t want to take the risk of an ARM with potentially higher rates in the future. They would have loved that $450,000 house… but they could only afford a $300,000 house with a higher fixed rate loan. They continue to make their payments at the higher fixed rate, and are somewhat mystified that those who got low rate teaser ARM loans might now be rewarded and get their loans converted to fixed rate loans, maybe even at lower rates?  So what kind of incentive is that for people to make prudent decisions in the future? What does that say to future potential homeowners and mortgage borrowers?  I think it says to do whatever the heck you want and you don’t have to worry about the financial consequences. Which is absolutely wrong of course.
   I think people who have made prudent decisions have a right to wonder about this. Some of the least appropriate lending decisions and home buying decisions have been made by people who misrepresented both income and their ability to repay a loan.  Perhaps unintentionally for many people as well. But now that real estate has dropped in value for many homeowners, why is it in the nation’s best interest to reward those who put themselves in this situation?  I’m really kind of curious as to what most people think.  Am I off base? Someone please explain it to me…
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