Mortgages: So What's the Plan?
The devil is always in the details, and that's certainly true of the plan brokered by the administration to help subprime mortgage holders.
By Matthew Mogul, Associate Editor, The Kiplinger Letter
December 6, 2007
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The plan to freeze "teaser rates" on subprime mortgages due to reset to higher rates within the next two years is a complicated one that won't help everyone. Here are some key questions and answers, with many details yet to be worked out.
Q: What's the gist of the plan?
A: It's a private sector plan brokered by the government that aims to prevent a wave of expected foreclosures. It would do that by allowing troubled homeowners facing interest rate hikes in the form of resets in the next two years to keep their lower introductory, or "teaser," rates for up to five more years. The rate freeze plan would apply to mortgage borrowers with loans taken out between the start of 2005 and July 30 of this year, and with rates scheduled to rise between Jan. 1, 2008 and July 31, 2010. Anyone whose rate has already reset is stuck with the higher payment.
Q: Are there conditions?
A: Absolutely. Lenders and mortgage servicers get a lot of discretion to decide who's in and who's out. And remember, the whole thing is voluntary for both sides (in fact, 16% of lenders aren't participating at all). To begin with, anyone already in arrears by more than a month is ineligible. Others will qualify only if lenders and mortgage servicers determine both that they can continue to pay current rates and that they cannot pay the reset rates. Homeowners now in the foreclosure process or those who have already refinanced are also ineligible. Only homes occupied by owners are eligible.
Q: How many will it help?
A: Estimates vary widely, and it'll take a while to really know. The Bush administration says that as many as 1.2 million of the 1.8 million facing rate resets over the next two years will be eligible to apply. Probably far fewer will qualify -- perhaps only a couple of hundred thousand.
Q: Is this a bailout? What will it cost the taxpayer?
A: That depends on what you mean by "bailout." Let's leave that to the politicians to debate and just say that the government won't put any money into this. Although the Treasury Department is spearheading the effort, private industry groups -- from lenders to Wall Street firms -- are footing the bill, largely because it's in their interest to do so. The cost of renegotiating loan terms, for example, is less than the cost associated with a foreclosure.
Q: So who will pay the tab?
A: Investors, for starters. Those holding complex mortgage-related securities will get a smaller return because the freeze lowers expected monthly payments. These investors range from mutual funds to pension funds to overseas hedge funds. That won't sit well with many of them, meaning that shareholder lawsuits are likely to emerge. Treasury Secretary Henry Paulson describes the litigation risk as "manageable."
Q: Why is the government doing this?
A: Two main reasons. The first is an economic one. The administration and many others worry that the mortgage mess will hurt the economy. They want to do "just enough" to keep huge numbers of homeowners from foreclosure, short-circuiting a bigger crisis. Still, everyone involved realizes that this plan is no silver bullet. Many think it's the first of several steps that will be necessary. In addition, no one is sure it will do much to alleviate the credit crunch or boost consumer confidence and spending. But it's not insignificant, either.
The second reason is political. Elected officials want to help and to be seen helping. They hope this plan does that. The administration and other Republicans also hope it will keep Democrats from taking more radical action that will involve a much greater government role. But some Republicans -- both officeholders and rank-and-file voters -- are already upset that it goes too far. And many Democrats say much more is needed.
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Reader Comments (13)
Posted by: Ben at 12/07/2007 10:02:51 AM
Given the initial comments where the Democrats don't think it did enough to help the homeowners and the Republicans complaining that it's a bailout for homeowners, perhaps it is good a solution to the subprime mess.
Posted by: Jeremiah at 12/07/2007 10:55:36 AM
To 'freeze' rates seems unreasonable to me. If there is 3rd party intervention then both sides of the table should give up something. No one thought of increasing the rates of resetting mortgages gradually or to the level at which the borrower can afford? After all lenders will be performing the normal credit and D/I checks. This way, lenders & investors don't take such a large hit and borrowers don't get a 'free ride' for the next 5 years. Regards, Jeremiah
Posted by: Brad Engelmann at 12/07/2007 05:28:44 PM
I venture to guess that this will not do anything to prevent the economic chaos that is ensuing. Hold onto your hats, folks.
Posted by: Susan at 12/07/2007 06:31:08 PM
Lenders, with their lax requirements allowed anyone (and I mean anyone, you didn't even have to prove who you are or whether you could pay a loan) breathing to obtain a loan. They paid bonuses in the form of Yield Spread Premiums (well hid on the Settlement Statements to look like the lender was paying rather than the Borrower over the course of the loan)to push lousy mortgages (negative amortization, prepayment penalties,interest only, etc.) They figured with bundled in hedge funds and insurance that they couldn't lose, so they didn't care! I say punish the lender. Freeze the loans at the current interest rate for existing mortgages only and freeze it now and for the next 3 years and let them eat it. The tax payers should not have to pay a dime of their punishment.
Posted by: Catherine at 12/07/2007 08:34:34 PM
Free Ride???? NO way-our mortgage has almost doubled and I don't think we are done yet. We do not qualify for this even if it goes through -- our mortgage started in late 2004 not early 2005. Sounds like opposers have the "hey, he got something I didn't" sydrome. With a hesitant market lenders do not want to refi and we are stuck with a rising problem. This isn't a luxury car that we didn't need this is our home. Merry Christmas to you too!!
Posted by: Bruce Allen at 12/08/2007 04:39:49 PM
What price, this bailout? How much will it cost the taxpayer? And when does this country declare war on financial illiteracy? Some of the comments I've heard in the workplace make me wonder how this country has gotten as far as it has. Wake up, America. Decision time is coming.
Posted by: JJ at 12/10/2007 02:18:27 PM
Catherine: Give me a break. It wasn't a luxury car, it was a luxury house. You had to have the 4 or 5 bedrooms and the granite and the upgraded bathrooms, etc. Whatever the case you could not afford it without a ninja loan. You made a bet the house would appreciate enough for you to refinance. You lost that bet. Too bad. Pay up. Merry Christmas right back at you.
Posted by: Jason at 12/10/2007 06:35:37 PM
The housing crises isn't that houses are rapidly declining in value, it's that they ever became so expensive to begin with. I say, let the housing-market correct itself and crash if it has too. Those of us who've realized we can't afford half a million dollar homes because our income wasn't going to double or triple in 2-3 years have been waiting for this. This is what the mortgage industry gets for giving out free cash to people with 450 credit scores.
Posted by: GWHITE at 12/12/2007 02:03:46 AM
The reality of the problem is cause and effect! When deception runs down hill from the Investors/Bankers to Account reps for those firms, to brokers and then to borrowers we are in a course correction. Today we are experiencing the Karmic effect of an industry justified its deception (the means) to meet the end (profit). Bankers, Brokers & Borrowers should equally deal with this issue! Bailing out Borrowers today is not only adding gas to the fire - but it is creating a dependence, entitlement & a Rising Victim mentality that allows me to take action and avoid the concequence. DO WHAT IS RIGHT LET THE CONSEQUENCE FOLLOW... DO WHAT IS WRONG LET THE CONSEQUENCE FOLLOW... I feel for those who will lose there homes, I feel for those bankers that are going out of business - but at the end of the day "no Accidents Only Lessons" What is your lesson, no matter how expensive and what will you learn from it in the future?
Posted by: Nick Glendora at 12/14/2007 01:55:58 PM
Well guys-the bail out happened-Everyone buckled under to the crying and whining. There is no accountability anymore.First I want to express my profound empathy for those home owners that were “tricked” into getting into an adjustable loan on a home that you had no business buying. You will have to lose your home and join the ranks of renters. Welcome aboard mate; my wife and I are also renters. BUT: the primary reason my wife and I are still renters is that the ignorant were “tricked” into signing these flagrantly risky “exotic loans”. Or much more likely, that greedy individuals misplaced their bets that home ownership was an ATM; causing the market to bubble and home prices to rise out of our budget. We knew that these exotic loans were risky; and that the market was inflated, and elected not to expose ourselves to the chance of loss. They are called “Variable Loans” for a reason, rates can adjust. We knew this not because we are especially intelligent, educated, or in some other way associated with a “silver spoon” heritage. We are just an ordinary American family who can balance our checkbooks and understand the concept of too good to be true. Everyone who is referred to as a “TROUBLED BORROWER” in this specific forum is really someone who gambled and lost. If someone goes to Vegas and gambles; do we as a tax-funded nation bail them out? To say “I could never have known this would happen” is to admit a total and complete lack of any understanding of basic finance. With the resources available EVERYWHERE today, ignorance is a choice. Just as you chose to sign that mortgage, you must admit that you made a mistake and live with the consequences. “STEP AWAY FROM THE HOME SIR, THE ONE YOU NEVER COULD AFFORD IN THE FIRST PLACE”. Just like a drivers license is not a right, neither is home ownership! Again, welcome aboard, I also am a renter. It’s not so bad, really. It is NOT fair that people who acted irresponsibly and purchased a home they could not afford should now be bailed out and allowed to stay in their home. NO, this home should revert back to the bank and should be re-listed as FOR SALE along with all the other unsold homes. In this manner the market will correct itself and home prices will adjust to actual demand driven prices. Perhaps one day my wife and I will be able to afford to buy our first home. We do dream of stepping into that promised land of “Home Ownership” one day. Only if the market is allowed to adjust will this happen
Posted by: Robert at 12/15/2007 12:35:17 AM
I agree that people who had no hope of ever affording the home they initially bought will have to simply become renters again. Many are losing nothing anyway, since they put nothing down on the house. However, there are many owners who financed with subprime loans that could afford their homes if the loan terms were simply more reasonable. Say the teaser rate was 6.5% jumping to 12% or more after 2 years, as is typical. Well, 12% quite frankly is a ridiculous rate to charge on a mortgage. yes, these people were stupid but alot were unsophistacted and alot were misled into these awful loans (that really should have been illegal to make in the first place) and would have qualified for FHA loans (at least the ones who put down 3% or more). I don't think letting them lose their homes is the proper answer either. There should be a middle ground--for example, many could afford say 8%--why not reset the loan at that rate? It's alot better than 12-14% and it still gives the lender an additional yield over a prime loan to cover the added risk. But in any event, this problem has gotten so big and has the potential to cause such dire consequences for neighborhoods, especially inner city ones, that something has to be done. Just like Chrysler was bailed out 25 years ago because of its importance to the economy, there are simply too many of these homeowners to allow them all to have their homes go into foreclosure. It's the "too big to fail" syndrome. So whether it is right or is it just?, it doesn't really matter. It is right to do something because the consequences for the country if nothing is done is so dire.
Posted by: Dysfucntional System at 12/15/2007 10:00:51 PM
Too many loopholes, too many thieves, too many lies, too many inorganic dollars, too few with all the money, too little power to the people, too many conspiracies. Our financial system is doomed to fail because it's rigged to benefit the few. How could you have a private bank called the federal reserve creating money out of thin air which produces artificial inflation, playing with interest rates to create boom/bust cycles that wreck havoc to the lives of far too many americans? YOU WORK TO RETIRE, AND THEY KILL THE DOLLAR. Why are the major brokers going around freely, unchecked, doing what they call financial engeneering, creating financial vehicles to squeeze the life out of you; in what school are they teaching thoses thieves ways to strangle the american families through the creation of deceptive financial vehicles that when the unexpecting and trusting citizens wake up they realize that what they've done to them is sinful, abusive and shameful. Yes why is wall st giving themselves this year record breaking bonuses something to the tune of 38 billion while security shareholders are losing 74 billion. The system is doomed to fail too late to fix it in my opinion. Get ready for a new type of currency this is a global problem.
Posted by: Malpas at 12/16/2007 09:39:31 AM
Wow....Glendora, you sound like what most people call a "HATER." You sound angry because other people were trying to better themselves and live the american dream (Home Owners) and because you couldn't do the same, you're actually happy because these people could possibly lose their homes and become homeless just like you and your wife. Everyone deserves a second chance.