Sunday, December 2, 2007

Rate freeze

Friday's LA Times "Officials act to forestall foreclosures" made me ask the question who would bear the cost of such a rate freeze on negatively-amortizing teaser-rate mortgages. The owner of the mortgage? More negative amortization to the debtor? Taxpayer bailout?

MSNBC's "Banks, U.S. near deal on subprime mortgages" (also here) clarifies it would be investors in these mortgages:

The major thrust of the proposal would be to get lenders to extend for a number of years the low, introductory rates that were offered on subprime mortgages, loans usually offered to borrowers with weak credit histories.

An estimated 2 million of those initial low, teaser rates are scheduled to reset to much higher levels by the end of next year, pushing the payment on a typical mortgage from $1,200 per month to $1,550, an increase of $350. The concern is that many homeowners will not be able to meet the higher payments, triggering hundreds of thousands of defaults.

That would dump even more unsold homes on an already glutted housing market, pushing home prices down further, jolting consumer confidence and raising the risks of a full-blown recession.

By offering a broad approach to extend the teaser rates for a certain period — officials and the industry are debating time periods of two to five years — it would allow between homeowners to keep making payments while the housing industry regains its footing.

Once the industry stabilizes and home prices are no longer falling, it will be easier for homeowners to refinance their adjustable rate loans to more favorable fixed-rate mortgages.

Asked about the proposal on Friday, presidential press secretary Dana Perino said, "The president has been clear that no taxpayer money should be used for any sort of bailout."

The plan under consideration does not include any government funds, but it would mean losses for investors who purchased mortgage-backed securities because they would be getting a lower income stream reflecting the delay in having the introductory interest rates reset. But it would still represent more money than if the mortgage went into default.

But if they can't afford fully-amortizing payments now, how would higher housing prices help? And as if this would end falling prices.

See also Housing Doom's "Most ARMs Not Likely To Be Affected By Reset Freeze":

... at best, this bailout might freeze around one in six ARMs from resetting. The plan, however, will not be able to prevent ANY home values from falling, which means that the risk of loans defaulting remain high.

Added Monday: See Calculated Risk on Secretary Paulson's statement categorizing homeowners, ending with CR's comment:

Whenever the freeze ends, most of the homeowners in the defined group will still face foreclosure. So the purpose of this plan is clear - since the industry lacks the infrastructure to handle the work load, this guideline helps decide which loans to foreclose on now, and which loans to foreclose on later.

10 comments:

desertpablo said...

The neg am arms were not a subprime product. The typical structure of a subprime was an amortized, 30 year loan, with an interest only payment for the first two or sometimes three years. The initial rate was pretty close to a prime rate, however the margin on the reset was punishing, usually by at least 200 basis points. Everyone had a plan to refi out before that, and millions did. Unfortunatly, they usually refied back into subprimes to bail out of their consumer debt. I expect to see a lot of 03-06 Hummers in front of rentals.

JBR said...

succinct analysis of this over at CR

http://calculatedrisk.blogspot.com/

"Paulson clearly defined the group of borrowers that are being targeted for modifications: Homeowners with "steady incomes and relatively clean payment histories who could afford the lower introductory mortgage rate but cannot afford the higher adjusted rate".

Whenever the freeze ends, most of the homeowners in the defined group will still face foreclosure. So the purpose of this plan is clear - since the industry lacks the infrastructure to handle the work load, this guideline helps decide which loans to foreclose on now, and which loans to foreclose on later."

Mikey said...

So, let's say Joe Schmoe steals a car. He "splurges" and steals a Porsche.

So now he's having trouble with the upkeep. Let's bail him out? Isn't that what the government is doing?

I'm pretty damn close to leaving this country for good (I was born here). The rule of law is gone. We've become a third world country.

I'd be real curious, though, whether a loan modification would constitute a 5th amendment taking. A mortgage is a property interest. Years back, rent control was deemed not to be a 5th amendment taking, but the Supreme Court is much more conservative now. Scalia wrote a very strong dissent back then...he's still there. Something to think about. The taxpayer could pick up the tab for all of this. I might even have to take it on pro bono, I'm that pissed.

Anonymous said...

I agree with you

no bailouts.

Let them foreclose

Anonymous said...

Great work on this blog

please cover all the foreclosures

however please also cover the very small island of continued upward price increases - the very very top of the market

a house just sold for seven million a few weeks ago

also - in 90403 a individual just broke ground on a five million dollar home for himself - this is not a builder hoping to sell it but rather an individual who is thrilled to pay five million all in for a new seven thousand square foot home in 90403

the blog is great - but give both sides of the market, not just the 99% that is going down but the 1% that is holding up

Fred said...

We all feel the same - no bailout of any kind.
Here is what I see coming:

1. Another rate cut ruthlessly thrashing the dollar, severely punishing savers. The stock market will stay high on this, forming the next bubble.

2. Step 2. The fed will claim that they must rescue FB's and enact a plan to keep them paying into a house that they cannot afford. This is really protection for the banks (keep money coming in and realize losses slowly) and screws the owners (paying huge amounts into a house that they would be much better walking away from). These poor folks will be slaves to houses they cannot afford. Most will still lost their home after paying every cent they can to the bank

sooo....
I really feel that we need to rally as a community to stop our politicians. We need to focus on key politicians to let them know we will vote them out of office. Why can they just not say "I am sorry for all of the folks that will lose their homes, much like I am sorry for those who lost money in the stock market crash, or for that matter at Vegas. However, it is inappropriate to step in here unless we also intend to freeze low credit card rates, and save other investment losses. (I think the real issue here is banks will fail, and property taxes will drop, thus they want to drag this out as long as possible)

They should be held accountable for their actions.

More important, what can we do? I signed an online petition, but that seems useless. I e-mailed Clinton, Boxer, anyone else I could find (and got some generic responses).

We need a bigger impact. Maybe something visual - how about a website where we submit videos of us burning dollar bills? (they will soon be useless anyway....). I dont know, but I am frustrated that everyone feels the same except for the politicians and a bunch of bankers with high salaries who should have known this was coming.... (how could they not foresee this, everyone was shouting about it?)

Westside Bubble said...

Hard to say how high-end prices are rising, there are so few. But I have noted properties like 1605 San Vicente ($22.5M), 1020 Palisades Beach Rd. ($10.55M), and 506 Palisades ($7.95M).

Agreed, Fred. See current comments on this by Calculated Risk, Market Ticker, Nouriel Roubini, and others (in links).

Blondie said...

Fred: I read your comments with interest. My husband and I feel the same way. I actually think there are a lot of people out there very frustrated with the situation.

What was different about your post was your call to action: so we are angry and we are about to be punished for being fiscally conservative. So what do we do? I don't know, but I will tell you that I found a video of Ron Paul questioning Bernanke's monetary policy that pretty much echos your sentiment. Check it out:

http://www.youtube.com/watch?v=yAwvlDJgJbM

WarChestSM said...

"also - in 90403 a individual just broke ground on a five million dollar home for himself - this is not a builder hoping to sell it but rather an individual who is thrilled to pay five million all in for a new seven thousand square foot home in 90403"

Please at least say that you are getting this info from my blog. It is the second post down on smdistress.blogspot.com

Anonymous said...

$4 million plus for a house South of Montana.

Is this a trend?

(I do NOT think so)