Banks Warm To Freezing Mortgage Rates

In what may be the quid to an election year bailout quo, major U.S. banks are supposedly close to sealing a deal with the Treasury Department in which adjustable mortgage rates would be frozen, extending "teaser" rates for up to seven years.

The upward resetting of mortgage rates has been a significant factor in triggering the spate defaults and foreclosures plaguing the subprime market (and in turn, the financial institutions holding portfolios of those mortgages).  There's some speculation on Wall Street that earlier speculation of a federal bailout of affected institutions may indeed be playing out.  This pending concession by major banks (effectively agreeing to accept a lower-than-contracted interest rate on high-risk loans in order to protect the borrowers from defaulting), including Citigroup, Wells Fargo, and Washington Mutual, might be just the sweetener needed to secure such a package.

Paul Krugman is delighted (well, as delighted as a man who predicts a recession four times each year ever gets), but probably only because he thinks this is the end of the story.  Evil corporations (and their millions of shareholders) finally doing what's right, ignoring financial reality, and making major concessions to the little guy, who they so viciously preyed upon with their accommodating credit policies.  When he sees whatever's on the other side of this agreement, he may be less pleased.

Kudos to the Bush administration. Yes, you read that right — although I need to see more detail before giving a thumbs up. But as of this morning, it seems that Henry Paulson is being much more proactive on the housing mess than I expected. –Paul Krugman, New York Times

In any event, some combination of this news, another round of sweet nothings being whispered by Chairman Ben, and oil prices diving, have inspired the markets to continue their marvelous 4-day rally.  How marvelous, you ask?  If the Dow ends the day near session highs, it will have been its best Tuesday-Friday run in history, adding more than 700 points.

Monday's ugliness spoils the chances of the index having its best week ever, but even so, it will be its best week in 4.5 years, if things don't turn sour in the next few hours.