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Freezing Sub Prime Resets: Will Paulson’s Plan Really Work?
Hank Paulson’s plan to freeze sub prime rates for trouble homeowners was the mortgage topic of the week. Since the discussion–like elevator music–seems to come from everywhere and nowhere at once, I thought I’d link to a menu of sites where you can get more on any particular piece of this issue.
In case you’ve been on vacation or just boycotting the news (for which I couldn’t blame you), the Bush administration announced a plan to freeze the interest rates for homeowners whose sub-prime loans are about to increase. The intent is good: stabilize the real estate market to stop the cycle of declining values, more foreclosures, further declining values, and so on.
First of all, view US Treasury Secretary Hank Paulson’s interview with Maria Bartiromo to hear it from the horse’s mouth.
Here are further Remarks by Secretary Paulson on Actions Taken and Actions Needed in U.S. Mortgage Markets at the Office of Thrift Supervision National Housing Forum.
Here is an article by Felix Salmon discussing the twin risks of litigation and investor perception associated with forcing a revision of mortgage terms on the investors who bought these securities.
The administration claims the plan could help as many as one million homeowners could be saved, though others (myself included) suspect that the real number is a fraction of that.
The questions are many, and the administration is still vague about the details. Here are some of the issues:
- Who decides if you qualify? Rumors are that the only people with resetting sub-prime loans who occupy their home, have a sub 660 Fico score, and who got their loans between 1/1/05 and 6/30/07 will qualify. That leaves out a lot of folks.
- Will help arrive in time? Or will this be debated to death in Congress?
- Is this a taxpayer bailout? Or do the investors take the hit?
- Does this punish homeowners who didn’t overextend themselves?
- What will participating lenders demand in return? Will the homeowner be required to give up their cable TV, sell the luxury car, quit the gym? Lender participation is voluntary, but you can bet they will want something in return.
- How long will rates be frozen? So far, the proposals range from 3 to 6 years?
- Will investors sue? Or will they be glad that they’re getting a lower yield on those bad loans instead of nothing at all?
- Will investors avoid US Treasuries and mortgage backed securities in the future? Or is this just an acceptable piece of the risk they took in exchange for the higher yield on these investments? For a very technical but insightful view, read Dr. Nouriel Roubini’s blog post Sense and Nonsense on the Mortgage Restructuring Plan and the Alleged Losses it Inflicts on Investors.
- Are critics just investors who have shorted the subprime market? Credit default swaps allow investors to profit from the subprime crisis. Which way are they betting?
Knock yourself out. But when you reach a conclusion, come back and share it with us here at Lending Clarity. I want to know what you think!
Need a quote or help with your refinance? I do loans in most of the western US. Contact me here.
December 8th, 2007 at 3:43 pm
So many questions. Answers? At least an effort is underway by government and banks to address the problem. Banks have a powerful incentive to avoid foreclosures. A TV report this week showed houses,with “Forclosure” signs, being broken into,occupied and trashed by sqatters in an area with multiple,empty houses in foreclosure. If I were a banker or investor I’d rather keep the mortgage payments coming at a a frozen rate than facing rebuilding costs and no payments. Lets hope for the best.
December 8th, 2007 at 9:35 pm
Half of something is better than all of nothing.
I agree Martin, and I think that’s why investors won’t be to upset by the freeze. As you point out, the bank owned properties are often trashed and require further discounts or repairs to make them marketable. This just represents further loss at a time when bloated inventories and tightening lending guidelines reduce the number of transactions in the market.
December 10th, 2007 at 9:07 am
Hey Marc, Question: What would you say to those that sqwauk about govt. intervention only exacerbating the inevitable? I have heard from more than one person that they feel our govt. leaders should just let the whole thing fall flat and then force the citizens to muscle through it. To me that approach doesn’t seem reasonable nor does it seem that there is a predefined inevitable outcome.
December 10th, 2007 at 2:30 pm
Hey Marc, a lot of people would prefer to see the greedy take their lumps, moral hazard and all that stuff. While I agree that people need to experience the consequences of their decisions (that’s what we teach our kids right?), there is a double standard.
Charles Keating and the S&L guys got a half trillion dollar tax payer bailout, and after cheating the system came back to buy, at pennies on the dollar, the same properties that they had let go to foreclosure. We paid for their abuse; they didn’t.
In this case, the investors will taking the biggest hit, which is how it should be. They were chasing higher returns and bet wrong this time.
At least it doesn’t appear to be falling on the taxpayers shoulders this time. IF it stabilizes values–that’s a big IF–then we all benefit.