The Wall Street Journal reports that 600,000 subprime mortgage borrowers could be bailed out under the Bush mortgage plan. As the details of the plan emerge, it's becoming clearer that the plan will punish those with high credit scores. reward some in the middle with mediocre scores, and punish those in the deepest amount of trouble. To get the reward, those receiving a bailout will be put through a battery of financial tests. And mortgage-backed securities (MBS) investor lawsuits are a safe bet if the plan ever goes into effect.
As I posted yesterday, the Bush plan creates more losers than winners. Those 600,000 with the potential to get bailed out are clear winners. The losers include all other mortgage borrowers, any mortgage investor holding the rights to the payments from the mortgages that won't reset upwards, the principle of free markets, and the already-tarnished Bush legacy.
Here are some more plan details: 1.2 million homeowners relatively current on their mortgages would contact credit counselors or their loan-servicing companies that would sort them by their credit and payment history and ability to pay. Those 60 days behind on more than one mortgage payment over the past year would get credit counseling to talk them through the loss of their homes.
600,000 of these are expected to receive credit counseling followed by a refinance that would lock in their teaser rates. These lucky ones who can't afford the higher payments, and who have credit scores below 660 and less than 3% equity in their homes, will get the biggest break from the lenders. They receive a five-year extension on their introductory interest rates, with the possibility that the grace period will be extended.
Another 600,000 with better credit credit scores and more equity will be deemed able to afford to pay when their existing loans adjust upward. They would receive no special assistance. A middle group, who may or may not struggle with the increased interest rates, will have to negotiate individually with their loan-servicing companies to secure a rate freeze, repayment holiday or other relief.
The Bush plan won't reduce subprime losses much. Analysts at Barclays Capital Research estimated that Bush's plan could reduce cumulative losses from subprime loans by 0.6 to 1 percentage point -- not much relief when losses could reach 13% to 15%. And the lawsuits filed by investors whose MBS contracts are being ripped up could be substantial.
When Bush announced his plan, he noted "the holidays are fast approaching." I don't know whether he thought his mortgage plan would be a great Christmas present to America, but it looks to me as though it will drop a lump of coal into the stockings of many borrowers and MBS investors.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
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Reader Comments (Page 1 of 1)
12-07-2007 @ 1:18PM
Brockage said...
Well, I've surrendered: I just sorta hand over my wallet to the government and say, here, take what you think is right. I'm a saver by nature, and that makes me an all around loser -- no bailouts for me, no juicy interest rates on savings for me -- oh well, if it means a better life for just one deadbeat, I guess it's all worth it. Merry Christmas.
12-07-2007 @ 3:45PM
4america said...
What you idiots think Bush sat down with the lenders and wrote this policy. Is there a fix for everyone. Each persons situation with mortgages is diffrent. Thank the lucky stars he is helping anyone. The greedy investors need to get a kick in the ass. The scum bag mortgage industry with the teaser rates deserve to get the worthless property back. The banking industy knew exactly how to get non qualified buyers into homes with these loans fully knowing what was going to happen, even with negative amortization to boot.
You love to put the Blame on BUSH for everything wrong in this country. I home you blame him when you can get it up !!!!!
12-12-2007 @ 10:36AM
Jim C said...
A little clarification. This is NOT a bailout. What is happening is that the lenders will freeze interest rates. In other words if someones adjustable mortgage was due to go from 6% to 8% it STAYS at 6% and does not rise. Money does not leave the treasury!!! The ones who get "hit" are the lenders, who should have not made many of the loans in the first place.
The author of the article needs to use better and more precise language in his description of the plan. A bailout is when money leaves the treasury. No money is leaving the treasury to help PAY for any mortgages but rather rates are frozen.
12-12-2007 @ 2:04PM
Kate said...
We should not be bailing anyone out. This was pure stupidity on the part of banks (greed) and the homeowners, who upon reading the fine print should not have signed. I have a friend who bought an expensive home well beyond his means. All the loan company asked for was two months bank statements and his credit record. That's it for a $400,000.00 home. Luckily, he has a set interest rate (due to excellent credit), but he would never have been able to afford the house if the bank required evidence of his ability to pay the $3100.00 mortgage payment. Now that the economy has tanked, he's worried how he'll meet that huge mortgage payment each month. I didn't buy a house, because I knew I couldn't afford it. What happened to common sense? Banks should pay the price as well as the homeowners. I hate anyone to loose their homes, but at the same time, if you can't afford it, don't buy it! The worst part is all of us that did not participate in this real estate bubble are paying the price for everyone else's greed. Should the banks and homeowners get off scott free? NO WAY! I also think the government should penalize the loan companies and banks who made unsound loans. They have a responsibility to the American people to use sound judgement.