“Federal regulators and U.S. lenders are focusing on five years as the duration of an interest-rate freeze on subprime mortgages, said a person familiar with negotiations aimed at fending off a jump in foreclosures.”
“More than 30 percent of borrowers with subprime adjustable- rate mortgages are behind on their payments before their loans reset higher and 775,000 homes with $143 billion of mortgage debt will go into foreclosure over the next two years, according to estimates from analysts at Credit Suisse Group.”
“One challenge will be to craft a deal minimizing lawsuits from investors in bonds backed by the mortgages being rewritten, analysts said. The longer that lower rates are extended, the more risk posed to the bonds’ values. Republican Representative Mike Castle of Delaware has proposed legislation offering a “safe harbor from legal liability” to mortgage servicers.”
∙ Subprime Rate Five-Year Fix Eyed by U.S. Regulators [Bloomberg]
If you’re missing payments now, you’re not going to be offered the deal. If you can make payments now but not after a reset, you will be offered teh deal.
I like this proposed legislation. It effectively penalizes people who are fiscally responsible and conservative when it comes to accumulating debt to the benefit of people who are reckless with their finances. Since debtors outnumber savers by a wide margin, this is guaranteed to have mass appeal coming into an election year!
How does this penalize people that were fiscally responsible? What PENALTY are they being subjected too? Seems to me you are saying that if they came up with a cure for a disease you would be saying that they are penalizing the people that were responsible enough not to catch the disease.
Whoops, my apologies for the horrid grammer in that previous post.
How could this “safe harbor” work given that it would be effectively amending existing contracts and thus presumably be unconstitutional? And even if it was somehow legal, it would be a sure fire way of ensuring lack of credit for the mortgage market down the road.
“How does this penalize people that were fiscally responsible? What PENALTY are they being subjected too”
It will tend to prop up existing home prices thus making it more difficult for those that chose not to make a fiscally irresponsible decision to enter the market. Additionally, it’s likely to push up the cost of future borrowing if bond holders know that the contracts they sign aren’t worth the paper they’re written on.
This “solution” is being brought to you by the same people who created the problem.
So the only fiscally responsible decision to have made is not to have bought a home? Yes, it will prop up prices which will help most home owners, so by that logic, home owner = fiscally irresponsible, renter = fiscally responsible.
Also, if all those loans default and the housing market continues to tank, those contracts are not worth the paper they are written on anyway…
The current crop of bond holders bought bonds that had inadequate risk premiums, those bonds are not worth as much as they used to be, modified or not. The larger the declines in the housing market the more risk premium that needs to be added to cost of future mortgages, so absent mass modifications the future borrowing costs would likely rise anyway.
If my credit card company raises my rate and makes it so I can’t afford the payment will the government come in and freeze it too?
@Amen Corner: Not sure how this “props up” prices; presumably, these loans are not easily available anymore (or as you say, they are now more expensive). It might make things stickier (by keeping inventory off the market), but the fuel is gone.
What you want to prevent is all the defaults happening “at once” — and this will help.
It seems like this is only going to be offered to a thin “sweet spot” of pikers — so if you are “rich” but used one of these loans anyway, no soup for you.
The folks who qualify for this will get slaughtered in a recession — they may have to walk away anyway. As long as it’s delayed a bit, the financial markets will be able to chew thru this, and that’s the point.
Everyone wins: the fed/state government (we’re helping you), the borrower (I’m morally superior),
the loan originator/seller (who already made the money), the loan purchaser (who doesn’t have to write the whole thing off their books yet), and local governments (we keep the tax revenue).
@BDB: Actually, if you get in trouble with your credit card debt there are ways to mitigate it. Usually calling the company directly will help.
“So the only fiscally responsible decision to have made is not to have bought a home?”
I was referring to folks that have made a fiscally irresponsible decision to get into the housing market, not to homebuyers in general.
“Also, if all those loans default and the housing market continues to tank, those contracts are not worth the paper they are written on anyway…”
The contracts are worth exactly what they say, including the risk of default. It should be for the bondholders to decide whether they want to modify its terms, not for the government to make a likely illegla edict that they will be.
Any bail out or government intervention is unnecessary and will be ultimately harmful – to the majority of us. We didn’t the Resolution Trust Corp back in the 90s nor the bail out of LTCM. Markets will adjust and recover just fine. Let the people that deserve to get hurt get hurt – and leave the rest of us taxpayers alone. We have the Fed to deal with interest rates, money supply and the credit markets. We’re not heading for another great depresion – why do we need the gov’t mucking around in private contracts? A flood of foreclosures may be a good thing (for the majority of us). Of course, this issue of gov’t intervention has so much appeal to meddlesome politicians of all stripes. Democrats want the perception of helping the poor little guy and Republicans ultimately support the notion of privatizing profits while socializing risk.
If the homes were foreclosed instead of having their interest rates frozen, new people would buy them. Then they would buy refrigerators, new furniture, remodeling services, and the like, strengthening the economy and putting it back on track. Instead, people who can’t really afford them will keep them and will spend nothing in the economy. Housing bears will stay away from the inflated prices and they too, will not spend.
This is not going to help the economy as much as it will help the bankers, who will now have 5 more years to recognize the losses. Thus, the economy will suffer to save the bankers. In the end, it will trigger a recession that will then cause job losses, which will lower housing prices, and essentially just make it impossible for any of these people benefitting from the freeze to ever pay these loans back.
When history looks back at this, it will be the straw that broke the back of the economy. It will be seen as the biggest foolhardy mistake anyone could have made, and exactly the opposite of what should have been done to put things back on track.
But recessions are what REALLY kill housing prices, and so, in the end, the housing bears are going to “win” really big.
I heard things like bonds issued by state governments which will be used to buy these mortgages ( instead of investor buying it, govt bonds sponsor it). If that is the case, ofcourse everyone is paying for it(either now or future, doesn’t matter). This is nothing but a socialistic policy..
@tipster — respectfully disagree: most of these houses will be foreclosed on, there will just be a delay (I bet a lot less than five years), giving the markets more time to adjust. Then new people can move in and buy the furniture, etc (I’m not sure where these folks will come from, but that’s another thread).
Modern, leveraged markets are bad at adjusting to sudden balance sheet changes — they are excellent at adjusting to gradual ones. I don’t want my/your business’ line of credit turned off because of this crap, and that could happen temporarily if everyone bolts at once. Remember, evil “bankers” fund just about everything that goes on in our economy: your business, your vendors, your customers, your employer, you, etc.
If this is done properly (a big if and I don’t know the details), it should lessen the severity, if not the duration, of a recession.
“If my credit card company raises my rate and makes it so I can’t afford the payment will the government come in and freeze it too?”
BDB: Well until the credit card companies bought off congress a couple of years ago, you could have just had a Federal Bankruptcy judge tell them you no longer owe them anything and you still got to keep all the stuff you bought with their money. Credit wise renters had a government-sanctioned advantage for years over legally escaping their irresponsibility.
C’mon, Socket, please … “bailout” is ONE WORD. To have this in bold print … it’s just poking my eyes out. 😛
Are you guys just getting lazy on us?
How much does the position pay? You can hire me on as your editor.
Oh, yeah … the grammatical error was so glaring I completely forgot to bitch about this post. Ugh, this whole non-BAILOUT BAILOUT is really giving me high blood pressure! Arrrrgh!!!
Please accept my apology for using “bail out” instead of “bailout”. Sorry if it contributed to your high blood pressure. Also, thanks for showing me the correct spelling of “Arrrrgh” – I had been using three r’s. I will make a note to use 4 from now on.
I thought how many “r’s” there were in “Arrgh” depended on how many years you have been a pirate. I was told you got to add one ‘r’ for every year on the high seas. Oh wait, just remembered, that is for the “Arrr” in “Arrr Matey”.
@ FSBO and Rillion: Thanks for the laugh, guys. 😉
“How could this “safe harbor” work given that it would be effectively amending existing contracts and thus presumably be unconstitutional?”
That was one of the challenges to rent control when it was originally enacted in the 1970s, and it lost (although it shouldn’t have). If the owners of these loans could successfully challenge this legislation, I’d love it.
On a related note, will they do the same thing in a year or two when all of those option ARMs get reset? THOSE borrowers, due to negative amortization, will probably just hand back the keys and leave it at that. But it will be interesting.