If you have read this site for any amount of time you know that I am not a fan of “late to the party” government meddling. Well the 300 billion dollar housing bill is a prime example of this, and others are starting to take notice.

Bloomberg has an article out today about how governments intervention will change the terms and perception of all of the housing contracts. Sure we are in a period of pain, but once that clears the market can resume functioning, that is what capital markets do.

But once the rules change, lenders get tentative until they are sure that government will not hamstring them in the future. They are in the business of making money and government is the entity that can keep them from doing so in the long term more than any other factor.

“If you change contracts, you call into question whether future agreements will be fulfilled,” Deutsch said. “If investors don’t believe contracts will be fairly upheld, the credit crisis in America will extend much, much longer than it would.”
More than moral pressure will be used to persuade investors to reduce the principal, said Frank, chairman of the House Financial Services Committee, in an interview last week.
“If this passes and is signed by the president, you have the House and Senate, the Secretary of the Treasury, the head of the Federal Reserve, urging them to do this, and they do, after all, want other things from us and I would think it would be in their interests to promote a cooperative relationship,” Frank said. “These are people who have to worry about what the legislative and regulatory framework is going forward. And if this kind of voluntary effort doesn’t work, then the likelihood is there will be tougher legislation going forward.”  via Bloomberg.com

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3. Mortgage Lending Drops as Interest Rates Rise – Surprised