Bush to freeze rates for 5 years - I should've been a lemming!

NEW -> Contingent Buyer Assistance Program
From what little I can determine, it seems this plan does not obligate the servicers to do anything they are not already capable of doing, nor does it give them any other options than are already available to them. In other words, "Hope Now" is actually just a bunch of political hoopla.
 
For those looking for the Bush video without the news spin, here is the original source. I wonder what the new Fed guidelines coming out tomorrow to reassure investors are?

http://www.whitehouse.gov/news/releases/2007/12/20071206-9.html
 
"* You must not have more than 3% equity in your home (what? are you f*cking kidding me? if you put money down you're f*cked!)

* Home must be worth more than the mortgage (ha ha ha ha ha!!!!)"

My question is: says who? An appraiser? Based on the last comp sale for that model and neighborhood (what, 2005?)
 
skeptic wrote:

"Fourth, if the backers of this plan are truly concerned about the borrowers that were taken advantage of (and, yes, I do think there were a lot of people taken advantage of -- primarily by shady brokers), then something should have been done to aggressively prosecute fraud. A broad-based bailout sweeps in too many people that don't need/deserve any help."

I spoke with two brokers today that lost their jobs within the last six months, who, oddly enough are now colleagues at my workplace, and they both agreed that the most important issue about this memorandum is that it is an issue at all. Both said individuals confessed to purposely Photoshopping appraisals and misrepresenting income to pass loans through underwriting. In fact, they spoke of how underwriting encouraged unethical behavior. The real issue, we agreed, is fraud. In my opinion, this memorandum is a public relations campaign to side-step the real problem.

Everyone involved, from the consumer to the broker to the lender, took part in a combination of unethical behavior, malfeasance, negligence and fraud.

Instead of passing band-aid legislation, can we tackle the real issue and come up with a solution so this doesn't happen again?

Also, it is debatable how this plan may help sustain prices in the housing market to soften the landing. Although such an argument is not necessarily the main purpose of the legislation, many Kool-aid side-liners who chose financial conservatism and patience over herd participance, and now find themselves waiting for affordability, have raised the question.

Two arguments could be as follows:

1) The plan will help more at-risk owners to keep their homes temporarily, and reduce the number of foreclosures entering the market over the next five years. This will ease downward pricing pressure on the housing market.

or

2) The plan will make mortgages even more expensive by lenders increasing mortgage rates, due to the re-evaluation of mortgage securitizations by investors in the bond markets. IR clearly demonstrates how higher interest rates decrease the amount available to finance (http://www.irvinehousingblog.com/2007/05/14/the-anatomy-of-a-credit-bubble/), and therefore more downward pressure is placed on the housing market.

Ultimately, the causes and effects may equalize and postpone the inevitable: the correction of the market to affordable prices and the eventual foreclosure of the home owners who never could afford a fully amortized payment to begin with.
 
P_O_IT_G,

Do those brokers feel any regret? I hope so.

Regarding your two arguments about the impact of this bailout on home prices, I have been wondering the same thing. I could see it going either way. Here is the take by a senior manager at PIMCO:

"A government bailout which alters contractual interest payments to bondholders will fuel moral hazard problems and raise mortgage rates for future borrowers and home buyers," he said. "This is not a path we want to head down in which government intervention bails out homeowners who failed to act responsibly."

"The entire capital markets system revolves around contracts and the ability to have a legal claim on assets," Kiesel said. "If that fundamental premise is challenged, it's only going to make the costs of capital go up in the future."

http://www.cnbc.com/id/22128632
 
But, it turns out no contract is being abrogated.

Also, almost no help is being given either.

Just some regulatory nonsense was cleared away, which might cause investors to lose more rather than less money, on modifications they might actually want to do, was cleared away. See Tanta's non snarky piece on Calculated Risk.
 
The real estate market has been great for years now. It's just bad for those who bought in 05,06,&07. Everyone agrees that homes are overvalued. Personally, I think that it wil continue to devalue for the rest of 08. However, excessive foreclosures are bad for the homeowners, lenders, and the economy as a whole. Eventually prices will bottom out. But for the sake of the economy, it's better to have it spread over a year or two rather than within months. We don't want each and every ARM reset to result in a foreclosure. For those who have equity, they can drop the price on their listing and still make it out of escrow without a short sale. For those you don't have equity, the economy needs them to continue paying their mortgage - even if that means making below market payments. They'll still be under in a year or two, but at least in the meantime, they'll have a place to live and they won't do further damage to the excessive supply of homes. So freezing the interest rate would help these owners manage as well as mitigate the foreclosure debacle. On the other hand, I've spoken to people who are pretty confidant about buying homes in late 08. They all make income in excess of 100K and are dying for the tax deductions. So far all the realtors and loan officers out there, I think there will be quite a surge in activity a year from now. I think the sales volume will bottom out by the middle of 2008. I think the home values will bottom out by the middle of 2009. But there will be plenty of people who will buy at the end of 08 knowing that prices might still go down a little bit. Finally, some bullish sentiments, no?
 
Sorry HS_teacher but I cannot disagree with you more. Any bailout plan is like saying that we should give drug addicts more drugs for a longer period of time so that they do not crash so quickly. I was going to write a long post in response but I think this article is much better than anything I can ever write.

www.forbes.com/home/wallstreet/2007/12/06/bush-mortgage-subprime-biz-wall-cx_lm_1207subprime.html

"President Bush's plan may make good politics, but it is terrible economics," said Edward Ketz, an accounting professor at Penn State University. "It punishes those who have acted prudently and rewards bad decisions by homeowners who bought what they could not afford. It gives incentives for future homebuyers to act rashly, because they may believe Washington will rescue them from error and greed."

Perhaps more significantly, Ketz and others warn the plan could further choke off the credit markets and result in higher mortgage rates in the long run.

Declining values in mortgage securities have plagued banks and investors since the summer, with banks writing off some $70 billion in mortgage and credit securities in the last three months. Modifying the terms of the underlying mortgages for some of these securities will mean payments even lower than the amounts investors had counted on when they bought the mortgage pools in the first place.

Mortgage servicers either originate their own loans or buy loan-servicing rights to them. The loans are sold to banks, which then chop them up and repackage them in securities, complete with ratings and tranches to appeal to different types of investors. These investors buy the securities expecting certain performance characteristics, including payment flows from the borrowers of the underlying loans.

If an investor can't count on the terms of a mortgage security at the time he buys it, he has less incentive to continue investing in them in the future. That would reduce demand for mortgage paper, in addition to embedding a risk premium in the rate for those investors still willing to take the gamble.

Investor demand for mortgage-backed securities--and banks' eagerness to buy loans, package and sell them to this hungry crowd--helped create the incredible run-up in the mortgage market over the last three years. Paulson's plan does not protect the investors of these securities--increasingly, as it turns out, public pensions and other public funds.

In a report Thursday, Standard & Poor's said freezing rates without assuring against further defaults "would have a negative impact on the ratings of certain U.S. first-lien subprime" mortgage securities. "Declining investor participation means reduced capital and liquidity, which may affect homeownership and borrowing opportunities," the company said.

In other words, this plan could make the whole situation worse, not better."

If you want to see what "bailout" plans do to an economy, go look at Japan. Huge housing bubble in the 1980s. Equity began falling, banks get bailed out and zero percent interest rate = 15-20 years of flat growth.
 
I think the plan is good. With the little information we have, it does literally nothing that the servicing banks couldn't already do. It merely clarified a way of interpeting a pair of regulatory terms. That's the best that could be done.

" For those you don't have equity, the economy needs them to continue paying their mortgage - even if that means making below market payments. They'll still be under in a year or two, but at least in the meantime, they'll have a place to live and they won't do further damage to the excessive supply of homes."

I couldn't disagree more. The absolute worse is to prop up artificially prices and pour income and effort into paying them. The faster and harder it corrects, the better. It will be painful, but when prices return to reality in comparison to rental rates and real financing terms, the sooner the Fed can return to actually managing inflation and the mitigating economic boom & bust and the players in the grand game that is now imploding itself, can return to real pursuits with real economic value albeit with a few economic scars.

Maintaining the current pricing environment will make the scars far worse, far deeper and damage our economic foundation far more. In essence, we are the little kid on the school playground with the big bully of our excesses. We can stand and take our punch today or we can cower and will reap the reward of punches, kicks, and terror for the remainder of the school year.
 
And the so called freeze does not obligate the servicers to do anything. The government has not mandated a freeze. The servicers have not agreed to a general freeze. The servicers will continue to do what is in the best interest of the investors. Nothing has changed. There is not bail out. The government has not given the servicers the power to do anything which they could not already do.
 
Except it gets around a pesky govt regulation the servicers and investors don't like.

Everybody got het up about exactly nothing.

Now Hillary may propose something that actually does something, but not for over a year, and by that time the depression will have come or there will be a little light at the end of the tunnel--say, some hope by summer of 2009.
 
I guess stated income is ok in the freeze plan.



White House plan may hurt mortgage investors.

Resets may be frozen unnecessarily, denting value of mortgage securities.

"The five-year freeze on rates is the most troubling part of the proposal," said Joseph Mason, associate professor of finance at Drexel University. "That will create great uncertainty, hurting investors and mortgage-backed security valuations in the secondary market."

The plan centers on mortgage servicers, which are contractually obligated to maximize the value of mortgage-backed securities for investors.



The new plan now means these servicers are not required to check the income of borrowers before modifying their loans and freezing the resets, according to Mark Adelson, a structured finance expert who has studied the proposal. Instead, servicers will rely on FICO scores, which measure how well a borrower has repaid debts in the past.

"They're not bothering to check if borrowers can afford the higher payments," he said. "That's outrageous."

There's also no bottom limit on the loan-to-value ratio of mortgages that will be modified under the plan. That means borrowers could own 30% of their home and still have an upcoming reset frozen, Adelson explained.

That's highly unusual because in a typical foreclosure of a home that's 30% owned by the borrower, lenders and investors usually get most, if not all, of their money back, he noted.

These two elements of the plan mean that mortgage resets will be frozen unnecessarily, knocking the value of securities backed by those loans, Adelson and others said.

"That is clearly a risk if you aren't fully underwriting," Karen Weaver, global head of securitization research at Deutsche Bank, wrote in an e-mail on Friday.

The White House plan allows servicers to skip such crucial underwriting tasks because of the sheer volume of loans that have to be modified. By just checking FICO scores and not having to call each borrower, more resets can be frozen quicker.

But that doesn't change the fact that important steps are being overlooked, Adelson explained.

Before modifying an adjustable-rate mortgage, servicers usually have to make sure that the borrower really can't afford the higher payment. But that involves phoning them and asking what their income is, then verifying that by demanding pay stubs, bank statements and tax returns, he said.

"This goes to the core of what they want to do. They want to be able to modify tens of thousands of loans without actually talking to people," Adelson said. "But when you modify a loan to someone who either has lots of equity in their property or could afford the reset, you're not doing the right thing by the investors in that loan. You're making them suffer an impairment unnecessarily."
 
Talk of gaming White House mortgage plan emerges

Experts worry borrowers may stop paying bills to qualify for reset freeze

http://www.marketwatch.com/news/story/story.aspx?guid=%7B9DB9CA92%2D070D%2D4F8E%2DA3A8%2DE5169D4FD359%7D&siteid=breitbart
 
If they do, the banks will have accomplished exactly the opposite from what they intended to do. This is a very dangerous game. I think it will be played only by people who were going to default anyway, and have nothing to lose.

So instead of squeezing a few months to years of mtg payments from poor souls who would have walked earlier, they will get less money from the people who stop paying earlier than they would have otherwise.

As someone said somewhere else on this blog:

Yeah, market forces. Go market forces, go.

May the market forces be with us.

Some new good stuff over at Calculated Risk. Purpose of "bail out" was to get borrowers to call servicers on the phone, instead of putting head firmly in sand. I don't think it will have this effect. I think heads will stay planted firmly in sand until it's too late.
 
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