Treasury Plan to Freeze Mortgage Rates
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"More than 30 percent of borrowers with subprime adjustable- rate mortgages are behind on their payments before their loans reset at a higher rate, according to estimates from analysts at Credit Suisse Group. The bank projects 775,000 homes with $143 billion of mortgage debt will go into foreclosure in the next two years."
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Hence, the political and economic motivation for doing something -- anything -- rather than look like they are just sitting there.
Which leads us to the just announced "rescue" plan. While it isn't exactly binding, it does have the support of "major investors." I assume this refers to the various banks, brokerages and funds that own the increasingly worth less and less (though not "worthless") paper.
The terms of the plan applies to "loans originated between Jan. 1, 2005, and July 31, 2007, that reset between Jan. 1, 2008, and July 31, 2010." According to the WSJ, the Office of Thrift Supervision Director John Reich said that "the plan could help "tens of thousands" of homeowners."
Tens of thousands? The subprime foreclosure forecast for 2008-09 is over 3/4 of a million homes.
The WSJ asked readers, Do you support the Treasury's plan to freeze rates on some mortgages? Their answer was quite similar to mine:
I am not sure why the rest of the crowd voted no, but I can tell you my reasons: This plan does nothing to address the issues which led to the snafu in the first place:
• The FOMC, who took rates down to historic lows, and left them there for a year;
• Ratings agencies, (not unlike the equity scandal of the 1990s) were in cahoots with underwriters, to the detriment of investors;
• The Federal Reserve, in their capacity of over-seers of the Banking industry, failed to supervise the rampant issuance of irresponsible debt;
I am sure you can think of additional reasons as to why this is unlikely to have a major impact. (Use the comments for this).
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Sources:
U.S. Mortgage Delinquencies Rise to 20-Year High
Kathleen M. Howley
Bloomberg, Dec. 6 2007
http://www.bloomberg.com/apps/news?pid=20601087&sid=aalYt3UzOuLU&
Bush and Paulson Unveil Plan To Aid Struggling Homeowners
DAMIAN PALETTA, AMY CHOZICK and JOHN D. MCKINNON
WSJ, December 6, 2007 2:44 p.m.
http://online.wsj.com/article/SB119696216000715924.html
Question of the Day
Do you support the Treasury's plan to freeze rates on some mortgages?
WSJ.com Forums, Thu Dec 06, 2007 2:28 pm
http://forums.wsj.com/viewtopic.php?t=1035
Thursday, December 06, 2007 | 02:36 PM | Permalink
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» More on the new mortgage plan from Econbrowser
While the plan may not be as big a deal as we thought, the problem still is. [Read More]
Tracked on Dec 8, 2007 1:16:58 PM
Comments
Does this plan take irresponsible borrowers off the hook and effectively reward them with a nicer house than they can afford?
Posted by: John | Dec 6, 2007 3:13:57 PM
It certainly looks that way
Posted by: Pete | Dec 6, 2007 3:24:07 PM
I said this yesterday and will say it again: Who in their right mind will lend money for home ownership ever again if the contract can become null and void the second the hoi polloi start screaming to their elected officials? Fannie? Freddie? Hell, they're bankrupt as it is and will only lend up to $417k which does nothing for either coast of the United States. Everyone in a protected mortgage won't ever leave cause they'll never get a better deal. Home prices will not reset to more sane levels. The Paulson proposal is a clusterfuck for generations X, Y and Z. Thank you very much. If this continues, the US is going to be just like Japan in the '90s.
So now we have a giant bubble and we're not going to let it pop. How exactly is this going to help drive economic growth? Oh, because instead of paying their mortgage, these same credit morons are going to rack up more credit card debt and Best Buy. That's genius.
(see:http://us1.institutionalriskanalytics.com/pub/IRAMain.asp)
Posted by: Richard Leite | Dec 6, 2007 3:28:43 PM
(CNN, via Atrios)
People who do qualify:
>> Have an income and live in their homes
>> Currently making their payments on time
>> Would default if their interest went up
>> ARM mortgage has to have been taken between 01/05 and 07/07
>> Has a rate reset to occur between 1/08 and 1/10
People don't qualify whom:
>> Have missed payment
>> Can afford mortgage rate increase
>> Don't have an income
>> Own homes which are worth less than their mortgage
The last point is material, (Atrios noted), as it removes from the ranks of the "Saved" all those who "might be able to refinance on their own".
Just food for thought.
Posted by: TS | Dec 6, 2007 3:30:34 PM
The foxes have hatched a plan to save the hen-house!
It involves the farmer paying for more chickens.
Posted by: deflator mouse | Dec 6, 2007 3:35:06 PM
I'm glad that I went long right before T-giving. No way this admin lets the market fall.
Posted by: LAWMAN | Dec 6, 2007 3:37:22 PM
This seems to be panic insanity on the part of the banking system.
What will happen if this plan doesn't work? What then?
So much for 'free' markets.
Posted by: bucky katt | Dec 6, 2007 3:39:04 PM
Fraud statutes were probably strong enough to deal with the less honest relationship(s) between mortgage brokers, appraisers and borrowers but were almost certainly not adequately enforced and the lack of policy in regards to encouraging sales agents to act in the buyer's interest (and the 'buyer' here is probably both the borrower and the securitizing organization). How about this as an addition to BR's list:
• State lawmakers and regulators for failing to require licensing and/or fiduciary responsibility of loan brokers and duly police local and/or regional loan origination and warehouse operations;
Posted by: RW | Dec 6, 2007 3:44:15 PM
I've thought for a while now that George Bush was nuts now I know he is.
Posted by: John Bennett | Dec 6, 2007 3:46:44 PM
HEY ... there's something fundamentally wrong here. WTF ever happened to CONTRACT LAW.
And, am I the only one that sees this new precedent as completely changing the mortgage industry. Are investors going to continue to loan on the same terms, knowing the government can come in and change the terms for political gain.
Posted by: Donny | Dec 6, 2007 3:46:59 PM
PS: The so-called freeze looks a lot more political then fiscal or financial; more about butt covering and spin control than anything else. I doubt it will have much impact in the real world. JMO
Posted by: RW | Dec 6, 2007 3:47:01 PM
This is indeed a glorious day for America, Right Comrades!!
Posted by: Mike M | Dec 6, 2007 3:51:27 PM
Mortgage brokers, investment bankers, appraisers, quasi govi entities, rating agencies, insurers should all be accused of racketeering. RICO the bastards and give what's left of their equity to the poor subprime borrowers.
Won't happen but I needed a happy thought...
Posted by: Ross | Dec 6, 2007 3:52:14 PM
Lesson learned: The Govt will only help you if you are completely reckless and create a huge problem.
The folks that are scraping by to make their minimum credit card payments need to hatch a plan that creates more pain for their CC companies. Then they'll get a "plan" too.
Posted by: brbrown | Dec 6, 2007 3:53:09 PM
Ditto Richard Leite
Posted by: The Dirty Mac | Dec 6, 2007 4:06:10 PM
"More than 30 percent of borrowers with subprime adjustable- rate mortgages are behind on their payments before their loans reset at a higher rate"
That means that this freeze won't help them. These loans are f'ed. Everyone (homeowners and investors) should just take the hit now and get it over with. Delaying isn't going to help.
Posted by: AJ | Dec 6, 2007 4:15:41 PM
I actually think this plan as described is perfect. The terms are narrow enough that very few people will qualify, so the economy won't suffer the negative consequences of a true bail-out. Yet it will satisfy Washington's need to appear to be doing something about "the housing crisis", thereby reducing the chances that a more substantial bail-out ever gets implemented.
Posted by: mappo | Dec 6, 2007 4:17:09 PM
This pretty well sums the subprime lender game>
THE GAME THAT YOU'RE PLAYIN' IS TOO HIGH CLASS
AND YOU'RE LIVIN' BEYOND ALL YOUR MEANS
AND THE MAN IN THE COAT HAS JUST BOUGHT A NEW CAR
ON THE PROFIT HE MADE OFF YOUR DREAMS...
TRAFFIC
(LOW SPARK OF HIGH HEELED BOYS)
video here
http://www.youtube.com/watch?v=ZVlbgqmxXNY
Posted by: bucky katt | Dec 6, 2007 4:23:01 PM
Just say no to bailout. On the other hand, I've made my share of bad choices and I should be compensated for it!
Posted by: Eric | Dec 6, 2007 4:25:43 PM
mappo,
I agree, though "perfect" might be a reach. No intervention at all is a political non-starter. This plan appears to simply recognize the fact that paint-by-numbers lending lacks the infrastructure to do artisanal workouts, and formalizes a management by checkbox approach.
Posted by: Estragon | Dec 6, 2007 4:26:47 PM
"WTF ever happened to CONTRACT LAW."
Really there would be less damage done if the government simply made cash payments to the "victims".
Posted by: The Dirty Mac | Dec 6, 2007 4:28:05 PM
Lets see if we can turn off the bold!
Posted by: Estragon | Dec 6, 2007 4:28:59 PM
Who pays for this ? Do the major lenders accept the huge write downs that this change will force ? doubt it.
Taypayer ? Yep most likely.
This idea is truly insane.
Posted by: Michael Donnelly | Dec 6, 2007 4:30:29 PM
The only good point I've heard in its favor is that this is just a token gesture so that the real comrades don't try to use the govt to get more involved.
Posted by: KirkH | Dec 6, 2007 4:33:47 PM
I agree w/ several comments. this plan if enacted will negatively change the mortgage industry for a long time. Contract law is broken, so rates will have to go up materially to compensate lenders to accept credit risk AND NOW THE NEW 'LAW CHANGE" risk. The game will change for a LONG time. Also, it teaches consumers that if you take risks, you better take HUGE risks so if it goes wrong, the Govt will "have" to bail you out. I love it...I get the chance of the upside of a stupid deal if it works and if it doesn't...oh well, the downside is capped. The plan doesn't help the issue of unsold homes inventory because the protected "squatters" aren't going to move for a LONG time and new mortgage rates are going to be so high that far fewer people will qualify for new loans. So we'll have a stagnant RE mkt for yrs. Sweet. What's not to love about that.
Posted by: craig behnke | Dec 6, 2007 4:34:25 PM
