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Freezing interest rates key to subprime crisis

Eric Frey
Eric Frey

Eric Frey

News of the economic fallout from the subprime mortgage crisis continues to dominate headlines. President George W. Bush is set to announce a freeze of interest rates on certain subprime mortgages. While the dilemma holds very few positive solutions, government intervention-including the freezing of subprime mortgage rates and a bailout of banks-is crucial to alleviating the effects and preventing a severe recession in the U.S.

In recent months home foreclosure rates have begun to skyrocket and housing values have decreased significantly.

Two weeks ago, Citigroup announced it would be forced write off as much as $15 billion in losses from subprime mortgage holders who were unable to make monthly payments. Only a few years ago, subprime mortgages were all the rage. First-time homebuyers and those with spotty credit records were able to secure subprime mortgages and fulfill the American dream of owning a home.

But those subprime mortgages included low introductory interest rates that were set to expire, and now that many of those low introductory rates have given way to higher interest rates, homeowners are unable to make the higher payments.

While disturbing stories of predatory lending practices by mortgage companies have been circulated through the press, it is ultimately the responsibility of homeowners to understand the conditions of their home mortgage and realize their monthly payments will eventually increase substantially. Americans must consider this a learning experience and realize every homeowner should read the fine print and know how his or her home mortgage operates.

This experience has also illustrated how interconnected the U.S. economy is with the entire globe. Countries all over the world are feeling the slump in the U.S. housing market and are watching the government's response to it very closely. And much more closely to home, the subprime fallout is also affecting college students. With a possible recession looming and the job market looking depressed, next year's college graduate could be directly impacted by the subprime mortgages.

Meanwhile in Washington, politicians should be careful to not politicize this issue.

Certainly sleazy business practices should be thoroughly investigated, but this problem was caused ultimately by an underlying assumption by banks and financial institutions that housing prices in this country would never go down.

And just a few years ago, that assumption seemed like a win-win situation for everyone involved.

Those who usually would not be able to secure a traditional home mortgage were paying on a low interest rate and living in a home that continued to appreciate in value each year.

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But now those happy times are over and government aid is the only answer to protect the greater economy.