WSJ: U.S., Banks Near A Plan to Freeze Subprime Rates

This isn't about keeping people in their homes. or the housing market. That is not the Treasury Department's job.



This is about preventing a run on US financial institutions, and maintaining market confidence that the Treasury isn't blind to problems.



Downside:



Higher interest rates (especially Jumbo).



Longer down cycle.



Less Lquidity to buy mortgage backed securities.
 
From what I've read, it doesn't appear that the government is "forcing" anything. It appears to be a PR schtick, with some coordination of terms thrown in. I would also guess that the government obtained cooperation with some regulatory changes that favor participating banks. I don't know what that would be, though.
 
I don't think this proposal will do much at all for the RE market. No secondary institutions will want to buy the MBS and most of the brokers that put these things together are already having to keep all these loans on their books.



What I really hate about this damn proposal / program is that it is just another way for the govt to remove responsibility from our society. It really irks me that the govt just does not let some ppl fail so that they can learn from their mistakes and make better decisions later.
 
<p>Oops, someone pushed the end of the domino chain! Pull as many subprime dominos as you can out of the chain, quick, before they ALL fall down ....</p>

<p>Bush Aims to Prolong Expansion With Subprime Freeze (Update4) </p>

<p>http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=a5iz4sQpA4Nc</p>

<p>``We know when foreclosures hit, it brings down the value of the neighborhood by 20 percent,'' said David Olson, president and co-founder of Wholesale Access Mortgage Research and Consulting Inc. in Columbia, Maryland. ```That's what they are trying to avoid.'' </p>
 
<p>Credit Crunch


<strong>A Subprime Solution</strong></p>

<p><a href="http://www.forbes.com/home/wallstreet/2007/12/05/subprime-paulson-bush-biz-wall-cx_lm_1206subprime.html">http://www.forbes.com/home/wallstreet/2007/12/05/subprime-paulson-bush-biz-wall-cx_lm_1206subprime.html</a></p>

<p>And investors may not like it. The financial industry lobby worked aggressively to make sure the plan included indemnification for them so investors of bonds backed by these mortgages won't sue them after lenders change the terms of the loans. The more lenders who volunteer to join the program, the less vulnerable they'll all be to lawyers, saying it had become industry practice.</p>

<p>...</p>

<p>The financial industry is outraged at the idea. "If a mortgage loan can be modified during bankruptcy, it will be far more difficult to originate or sell mortgages in the secondary market," says a Dec. 4 letter from the Securities Industry and Financial Markets Association to the Senate's Judiciary Committee. "These proposals would reduce liquidity and make it harder for Americans to obtain a new mortgage or refinance their existing mortgage, the exact opposite of what the mortgage market needs now."</p>
 
<p>In a couple of the least snarky posts produced by Tanta at Calculated Risk, the Great Freeze is analyzed as being No Big Deal. Not one giggle resulted.</p>

<p>No violation of contracts, just some bucking and weaving to avoid regulatory requirements.</p>

<p>Also, the frozen teaser rates are 7 to 8 percent to adjust to 10. This is hardly what I've been thinking of as a teaser. I am distinctly not teased by 7-8%, but I guess somebody was. So rates averaging 7.7% are being held the same instead of going to 10%. . . .Yawn! </p>

<p>None of these 1% jobbers being held at one %. I suppose the loss of 1 and a half % was deemed by somebody to be cheaper for the lenders than foreclosure.</p>

<p>Apparently the servicers are contractually allowed to do some modifications now, and this is being clarified. As I said, Yawn. . . .</p>

<p>Although, this program doesn't help many people in trouble either. All public relations, no meat. Probably a few thousand people will be "helped" in the next couple of years. Another post sez that 40% to 60% of people who successfully modify can't keep up with the modified loan, and are foreclosured in the next couple of years anyway.</p>

<p>All in all, No Big Deal.</p>

<p> </p>
 
<p>Tanta in the CR comment thread: <em>"It is a bunch of industry participants being encouraged to take basically voluntary actions at the Treasury's behest. There is certainly government influence. But I've seen nothing that says a servicer or a security can't just ignore this if they want to."</em> </p>
 
<p>Roubini's take on the deal</p>

<p>Sense and Nonsense on the Mortgage Restructuring Plan and the Alleged Losses it Inflicts on Investors</p>

<p><a href="http://www.rgemonitor.com/blog/roubini/230954">http://www.rgemonitor.com/blog/roubini/230954</a></p>
 
<p><a href="http://money.cnn.com/2007/12/06/real_estate/Bush_plan_is_limited/index.htm?cnn=yes">http://money.cnn.com/2007/12/06/real_estate/Bush_plan_is_limited/index.htm?cnn=yes</a></p>

<p>"Of the perhaps 2 million subprime ARMS that are expected to reset through the end of 2009, only 240,000 of those would be covered by the freeze, according to an analysis made by investment bank Barclays Capital as reported in <em>The New York Times</em>. The Center for Responsible Lending, a group that promotes homeownership and works to curb predatory lending, estimates that only 145,000 households will qualify for the rate freeze. "</p>

<p>So over the next two years, somewhere in the 5-10% range of the borrowers that got fairly plain sub-prime ARMs will have an attempt to be frozen IF they call first.</p>

<p>I suspect it will be much less.</p>

<p>I also suspect it will cover virtually nobody in the SoCal area.</p>

<p>Actually, I wonder if this does apply to the option ARMs. If I recall correctly, their teaser rates typically did run 7-8%, nobody paid attention because their payment OPTION ran something like $450/$150,000 borrowed. I was watching TV last night and so a loan commercial bragging about the low payments... $1227/$200,000.</p>

<p> </p>
 
<p>I watched a press conference with Shumer and then another with various bigwigs including Paulsen.</p>

<p>Paulsen must be the grimmest man alive. He never even cracked a neutral expression, must less a smile. He looked grouchier than the grinch.</p>

<p>Shumer impressed me. He pointed out that he had a constituent would might have been helped, except her mtg reset in December, not January.</p>

<p>Even tho this was a CNN offering, of interest only to wonks and nerds, facts were really missing in action.</p>

<p>But from what I saw, this is no bail out of anybody but the mtg industry and investers. In fact, it seemed to be devised for investors.</p>

<p>Shumer pointed out that nobody is actually bound by anything, and if an investor opted out, well they could. It wasn't clear if the whole thing went down the drain if someone opted out.</p>

<p>No word what happens to the lost interest. It may be that the investors are willing toss it because it's cheaper than foreclosure, by far.</p>
 
What freeze? As far as I can tell, there is no obligation by any servicer to abide by any of these terms. Nor has any option been made available that was not already existing.
 
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