Bloomberg reports this morning that Treasury Secretary Henry Paulson and President George Bush may announce as early as tomorrow that negotiations between Federal regulators and U.S. lenders will result in a five-year freeze on subprime mortgages. Paulson will brief House Republicans today on the plan, according to Bloomberg.
The deal comes down right in the middle of what the Office of Thrift Supervision wanted (3 to 5 years) and the FDIC wanted (5 to 7 years). The details about the deal are still pretty sketchy, but at least some people who have subprime mortgages will be helped. Most of the mortgages involved in this deal started at about 7% to 9% and are due to reset to 11% to 13% over the next two years, throwing many borrowers who can't afford the higher payments into foreclosure.
Analysts estimate that about 100,000 subprime loans will reset at a higher rate every month for the next two years. Credit Suisse Group estimates that right now, 30% of borrowers with subprime ARMs are behind on their mortgages, even before the reset. The FDIC puts the number at 20%. Regardless of the number, these borrowers probably won't be eligible for the freeze in rates.
The ones who will be helped according to the scanty reports we've seen so far, are those borrowers can prove they can't afford the higher rates but who have been making on-time payments up to their loan reset date. Those who can afford the higher payments won't be eligible for the freeze This is all speculation as the final details have not yet been made public.
Legislation might be needed to protect mortgage servicers who agree to the deal and Democratic Representative Mike Castle of Delaware already has introduced safe harbor legislation. Investors who don't like what the mortgage servicers agree to with borrowers can sue for the lost value of their bonds. Extending lower rates, likely will result in lower values for the bonds tied to these mortgage securities. While investors will take a hit on these bonds, they'll still get a lot more money on their investment than they would have if the home mortgages tied to these bonds go into foreclosure.
This deal will help to stabilize the mortgage mess, but don't expect a rapid turnaround in the real estate market. There's still a glut of homes that need to be sold before this buyer's market turns to a seller's one. We're still years away from any significant improvement in real estate prices in the hardest hit areas.
Lita Epstein has authored more than 20 books including the Complete Idiot's Guide to the Federal Reserve" and "The 250 Questions You Should Ask to Avoid Foreclosure."
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Reader Comments (Page 1 of 1)
12-05-2007 @ 12:51PM
M. Q. said...
ROLE OF GOVERNMENT - Understand the role of Government. It is not designed to bail out banks who overextend their assets. They issued loans to people who cannot afford to pay back the loans when the adjustable interest rates rise. People who overextended themselves to purchase properties they can not afford should not be bailed out. If it comes to foreclosure, they will either find more affordable housing to own, or rent like many others. Therefore, the only losers are the financial institutions who risked their capital, people who overextended themselves, and taxpayers who fund any bail out. Government responding with knee-jerk solutions are being political, not fiscal. Owning a house is a privilege, not a right.
FALLING HOME PRICES IS WARRANTED - In regards to falling housing prices, the low interest rates pushed up the price of homes based on affordability. People were able to afford more expensive homes, since the loans issued allowed lower payments. Foreclosures will reduce the inflated price of housing. More moderate housing will be bought by homeowners who can afford to upscale after the foreclosures are moderately priced.
NO DOWNTURN IN ECONOMY - The resale of these existing homes will still encourage purchases of durable goods to upgrade amenities for these homes. Based on the low unemployment rates, and low dollar, the economy will continue to keep going. Based on the current financial situation, companies have enough funds in their reserves to fund their operations without needing to borrow from institutions.
12-06-2007 @ 4:05AM
Jim said...
This plan apparantly isnt a bailout.The only people who can qualify for a rate freeze are those people who are current but cant afford the increase.Who is going to figuire that.Surley not the same people who took 5 months and 300,000 foreclosures later to do anything.We are headed for a depression not a recession and its all because of greed.
3-04-2008 @ 5:50AM
LittleMe said...
Not all people who own a mortgage have this problem. Some mortgage holders have other mortgage company problems such as payments missplaced in other accounts. Force to pay more monies although it was there mistake then have that same company foreclose on you. They do not help you. That's not thier job. The mortgage companies are to blame most of the time.