Mortgage Bailout Plan / Subprime Rate Freeze
A: Back to work. What do you do when free markets take advantage of ultra cheap money and a booming housing market? You have gov't step in of course to clean up the mess! However, I caution anyone from interpreting this Bush sponsored subprime rate freeze as anything more than political window dressing. While the full plan has yet to be unveiled, major parts of the plan were and from what I can tell, this is nothing more than putting 2 or 3 band-aids onto a gunshot wound. I'll explain why.
First off, this subprime rate freeze plan does NOT affect all subprime borrowers about to be dealt with higher resetting mortgage payments. That is the most important thing you need to know. It is not a fix-it-all plan and it will not stop foreclosures and defaults from rising in 2008! Sure, it may help a little, but the most I get out of this is a stab at restoring confidence into the credit markets that the gov't will be there to help if things get hairy.
What's unusual here is the grand scheme of things is the proactive measures that both our gov't and the federal reserve have been taking lately! Is anyone else noticing this or viewing the situation in this light? I mean, if it wasn't for rate cut hopes via a fed governor speech or a Super SIV bailout plan that will ultimately be half as big as once thought, or now gov't intervention to freeze some subprime mortgage rates, where would be right now? There is an awful lot of action being put in place beforehand to soften the hit that is obviously expected to come later on. I digress.
Back to the mortgage bailout plan. Here is who the plan will work for:
a) ONLY loans made at the start of 2005 through July 30th, 2007
b) ONLY loans that will reset to higher rate between Jan 1st, 2008 through July 31, 2010
c) ONLY owner occupied borrowers (primary residence borrowers)
d) ONLY those borrowers who CAN afford 'teaser' payments & CAN'T afford resetting payments
e) ONLY those borrowers who CAN PROVE they cannot afford resetting payments
f) ONLY those borrowers who are making payments ON-TIME
So, completely eliminate speculative borrowers who used these teaser mortgage products to keep costs ultra low while they flipped their properties! Also eliminate any borrower who...
1) already had their teaser rate reset to a higher rate
2) already are missing payments
3) was savvy enough to avoid a teaser mortgage product but now pays a higher 30YR fixed rate
Obviously, those in dire need are not going to qualify for this plan! You must also understand what most subprime borrowers deal with. Since they are subprime, or poor credit borrowers, even their teaser rate is much higher than a 30YR fixed rate that most of us take for granted. Most subprime mortgages start at teaser rates of between 7% - 9%, only to re-adjust to about 9% - 11% or so after the teaser period is over. This is the price you pay for having poor credit and buying a home during a real estate boom where lenders didn't care whether you could actually afford the house or not!
The fault lies partly to the borrower & the lender. As painful as it is for anyone to lose a home, fact is way too many people bought a house they couldn't afford in an attempt to ride the real estate boom bandwagon. They were just poor investment decisions that went through because the lenders allowed them too. In the eyes of the lender, it was more about getting the deal done, collecting their fees, and packaging the loan up into a mortgage backed security that could be resold to some other investor to deal with! Well, the game is over and now we are paying the price with an illiquid secondary mortgage market where no investor is putting a desirable price on these mortgage backed securities.
I wonder how the ABS (asset backed securities) investors are handling all of this now that they will take a costly hit here as they will not get their higher resetting rates for some holdings; which is the whole point of dealing with these types of borrowers in the first place, to get that higher rate. I'm sure you'll hear more on this side effect as the full plan is unveiled.
This subprime rate freeze plan will not fix the problems we face in the housing downturn cycle or the crisis to the credit markets & secondary mortgage markets that happened as a result. It may install some confidence for a while though and it may help some struggling borrowers, but it won't nearly be enough!
Posted by anon
Thu Dec 6th, 2007 11:03 AM
Noah - I love your posts, but please use "effect" and "affect" properly. Believe me, it makes an impression on readers.
Posted by uwsider
Thu Dec 6th, 2007 11:05 AM
Just a passing comment about all these band-aids.. I recall Japan also tried a similar thing when bad bank loans went bad .. they kept trying to 'prop' them back up which resulted in the 10 year slow death ...
Do you think US could see a similar looooong slow death?
Posted by Noah
Thu Dec 6th, 2007 11:09 AM
anon - lol! I type so fast that I often use 'affect/effect' and 'their/there' and 'than/then' incorrectly.
I apologize and will certainly try to correct in future.
PS: I got a 470 in English SAT's! Not my strong point! 690 in math though
Posted by Noah
Thu Dec 6th, 2007 11:10 AM
uwsider - yea, there is a disturbing similarity there isn't there!
You know, Im not sure but I seriously wonder how financial institutions will make as much money as they did in past years given current situation. I dont see that long a death, but I do see a very tough 2008-2009!
Noah
Posted by Nick
Thu Dec 6th, 2007 02:53 PM
I read those qualifications, as well, and wondered "Who in the world is going to meet all these requirements?" Certainly only a small minority of homeowners. The whole bailout package so far seems to be more of a morale-booster and public relations move for a Congress and administration with very low approval ratings. And no amount of legislation will convince loan applicants to read dozens of pages of disclosures.
Posted by Paula
Thu Dec 6th, 2007 05:09 PM
Noah - Assuming the final plan is as stated, it will not help those who are already in the red and sinking. You're right, it is a temporary band aid for a select few.
Posted by Chris Lengquist
Thu Dec 6th, 2007 06:50 PM
It won't help the speculative buyer. Nor should it. They are a huge part of why prices went to high and now why they are falling back down.
Posted by Ryan
Fri Dec 7th, 2007 11:46 AM
I couldn't agree more with your comments about the rate freeze plan. It's a temp fix that at the end of the day, all Bush is really doing is putting off a recession for someone else to deal with and trying to give the Republican party a chance in the 2008 elections. There is and will be more blood spit up by the financial sector in 2008. The big question is: what to do with your financial holdings? Do you hang onto them and ride out the storm or sell them on their good news rally about the rate freeze?
Bernanke's also got a very tough role to play in this outcome. He needs to determine where rates should be/need to be, how fast to move them there and how that will affect inflation, oil prices and the economy, while trying to achieve a "soft landing" without resparking the housing market bubble.
Volatility is likely to continue into 2008 with defaults in the credit markets increasing in 2008.
Posted by Brenda
Fri Dec 7th, 2007 12:32 PM
Ryan,
Absolutely. Bush wants the full-blown recession to occur after the elections. I think the longer this debacle continues, the greater the harm to the economy. Laying all the losses (to the extent possible) on the table, dealing with them, and going forward would be painful, but less painful than creating a longer-term environment of continued negative news, with up and down (soon only down) swings. That will cause a great deal more distrust and lack of confidence.
Regarding your financial holdings, at least in terms of a 401(k) where gold, etc. isn't an option, what do you do with your money? Money markets and bonds may not even be safe. I'm sticking with strongly equity-based funds, natural resources, etc. They may drop in the short term, but the GDP is strong, exports are high, and at least there's production behind them. The rest of my money I'm keeping in cash, at 4.5%, and hoping for the best. This is ugly.
Posted by newbie
Fri Dec 7th, 2007 12:55 PM
There are a lot of expectations about what Paulson's plan is and what it should be. It's not a bailout and will only help those who were in a position to avoid risking foreclosure in the first place.
It sounds like a big loan workout program for a select group of borrowers with good credit who comprised the majority of subprime borrowers within the past 2 years. These folks would have qualified for loans with better terms anyway (according to the WSJ this week, "Subprime Debacle Traps Even Very Credit-Worthy", 12/03/07).
The plan on its own won't address the key reasons for the mortgage mess - cheap money, unethical/loose lending standards and unrealistic expectations by borrowers. Some of these issues are already being addressed to some degree by various Federal, state and local initiatives.
So is Paulson's proposal the right thing to do? Is it fair? What's the alternative - or should there be one?
A full-on bailout would be prohibitavely expensive and reward those who took unrealistsic risks.
Administering the Paulson program will be time-consuming (you have to look at each borrower's terms, financial stability, various state laws & regulations, etc.). So imagine how much more challenging it would be to expand this plan to lower-income borrowers, many of whom may not have the sophisticated understanding of finance, lending, etc. and would require more handholding.
It would mean greater backing from the Federal government. In the meantime assistance from local community groups on credit counseling could be a start.
But at the end of the day many people bought homes they should not have. And many others were able to buy homes for the first time and are not going to foreclose. So much of the US economy floated on the RE market and now it's adjusting. Paulson's plan is a start but it won't address the issue, nor should it.
Posted by Noah
Fri Dec 7th, 2007 01:57 PM
"Volatility is likely to continue into 2008 with defaults in the credit markets increasing in 2008."
Ryan - dead on! I fear this will not be a fast pain, but rather will be a longer, drawn out slowdown as lack of liquidity is resulting in the seizing up of credit markets. If we slow, so will the world; I dont care what anyone else says.
Global slowdown will extend this mess.
Posted by drtomaso
Sat Dec 8th, 2007 02:57 PM
I think theres another requirement that knocks the vast majority of borrowers out of eligibility for this bail out: the loan cannot be for a value greater than the value of the home.
How many subprimers (this bailout only concerns them after all) are upside down on their LTV? My guess is the majority. Heres why: the bailout only covers loans from 1/1/2005 and up- the tippy top of the bubble for most areas- meaning there is little to no appreciation. Add to that: how many of these loans were for 0-down? If you didnt put any of your own skin in the game, or even if you only put a little in, you start out under water. How many of these loans were neg-am loans, and because of how little the buyer has been paying, have seen negative amortization? How many involve second loans? Or for those that did get some appreciation: how many involve HELOCs? How many were victims of rank appraisal fraud that was rampant until the prices turned down?
Posted by rita
Mon Dec 10th, 2007 11:25 AM
wow, I have read these posts against all better judgement. How depressing to see how many heartless people there are out there posting. While you all are being pontifical, remember that there are a lot of people out there who only wanted a piece of the pie. A wound needs a bandage before it can be healed. At least this freeze will give some real people time to hold onto their dream. In the meantime, how about some of you out there use your gifted intelligence level to offer a better solution?
Thanks, my sister and her family could use your help.
Effect/Affect???? Who are you kidding lady??
Posted by drtomaso
Wed Dec 19th, 2007 10:27 PM
While I sympathize with the many millions of homeowners who are out there feeling the pinch and the hundreds of thousands to millions who will actually lose their homes over this, I cannot endorse any solution that approaches moral hazard. They wanted their piece of the pie- they gambled- so we all lose?
We all rent- some of us rent land, and some of us rent money. Those of us who rented land have been mocked and derided for nearly 3 years now- we didnt see that "Real Estate only goes up!" and that "they arent making any more land!"
I'm sorry- but I call em like I see em. Did you buy a second home? Speculator. Did you take a mortgage whose terms only made sense if real estate continued to appreciate for ever? Speculator. Did you buy a home at twice the cost of renting because you didnt want to get priced out of a dream you could already only barely afford? Speculator. Did you take a mortgage that would adjust to levels you couldnt afford on the assumption that you would be able to refi later? Speculator.
Here is my solution: its one that has worked for hundreds of years. Let the market correct. Yes- people will lose their houses. They will go back to renting, and maybe next time they will be less likely to gamble with the single biggest purchase of their lives, and prices will remain near historic trends, rather than several standard devs above the affordable mean.
Posted by JC (Mortgage Foreclosure Blog)
Tue Dec 25th, 2007 03:10 PM
The HOPE NOW (Bush/Paulson plan) is just one of the many programs that are being setup by the government and banks. We created a simple wizard to help you figure out what mortgage rescue program you qualify for by just answering a few simple questions about your mortgage. It also checks for qualifying factors for the HOPE NOW, FHASecure and other programs.
Posted by LW
Wed Feb 27th, 2008 05:06 PM
GREED.
Posted by Dannan
Tue Mar 4th, 2008 08:47 AM
who do i contact so that i can put the freeze in place. I qualify going off of you list?
Posted by Some More
Tue Mar 4th, 2008 04:07 PM
Here's the full list of lenders freezing HELOCs now: http://www.helocbasics.com/which-lenders-are-sending-out-heloc-freeze-letters/
Posted by IT Training
Tue Apr 7th, 2009 03:34 AM
yes Govt must step in to clean the mass if it is destroying booming housing industry.
Posted by Kelsey
Tue Jul 6th, 2010 06:33 AM
The post is very informative. The information on how to qualify for the subprime mortgages is good and excellent. Thanks for the post.
Posted by Stop Foreclosure
Wed Sep 8th, 2010 11:25 AM
I found your blog while searching for news about mortgages and foreclosures. I'll be adding this to my Google news reader. Thanks for the post!