‘Hope Now’?: US, banks, near plan to freeze subprime rates

Discussion in 'Economics' started by ASusilovic, Nov 30, 2007.

  1. The Bush administration and major financial institutions are close to agreeing on a plan that would temporarily freeze interest rates on certain troubled subprime home loans, reports the Wall Street Journal on Friday, citing people familiar with the negotiations.

    An accord could reassure investors and strapped homeowners, both of whom are anxious as interest rates on more than 2m adjustable mortgages are scheduled to jump over the next two years, says the Journal, noting that the plan could also give a boost to the Bush administration, which is facing criticism for inaction amid the recent housing turmoil.

    According to the Journal, the plan is being negotiated between regulators including the Treasury Department and a coalition of mortgage-related companies including Citigroup, Wells Fargo, Washington Mutual and Countrywide Financial. People familiar with the talks say the individual members have agreed to follow any agreement reached by the coalition, which is called the Hope Now Alliance.

    Details of the plan, which could be announced as early as next week, are still being worked out. In general, the government and the coalition have largely agreed to extend the lower introductory rate on home loans for certain borrowers who will have trouble making payments once their mortgages increase, the Journal says.

    Exactly which borrowers will qualify for the freeze and how long the freeze would last are yet to be determined. Under one scenario, the freeze could run as long as seven years. The parties are developing standard criteria that would determine eligibility. The criteria should be finalised by the end of year.


    Some Resistance

    Mortgage-industry lobbyists have argued an across-the-board solution is difficult to apply. Rewriting contracts also risks moral hazard -- encouraging borrowers to take on more debt in the expectation of being bailed out if needed later.

    ``It is really an indiscriminate procedure that would violate the terms of the contract that provide for loan-by-loan decision making,'' George Miller, executive director of the American Securitization Forum, said in an interview this month. A broad approach would ``significantly disrupt the reasonable expectation of investors'' in the $7.1 trillion market for bonds backed by mortgages.
  2. Suppose investors buy these mortgage backed securities expecting that mortgage interest rates will increase. Freezing subprime rates might further reduce demand for these securities. Security prices might be reduced, showing greater losses for the holders of such securities.

    Another thread http://www.elitetrader.com/vb/showthread.php?threadid=110754 describes Florida state investment funds might be holders of these sub prime mortgage backed securities.
  3. Hurray, a Bush appointee, Paulson at the Treasury, is finally doing something. This forestalls foreclosures which would add more inventory. This could be the bottom in housing as rates are lowered to draw in more people to clear out inventory.
  4. freezing interest rates won't help much. the main reason the monthly payment goes up dramatically is because they convert from negative-amort into full principal+interest payments. preventing their 6% rate from going to 8.5% only does so much.

    unless they are allowing the borrower to continue paying the "teaser" rate of 1.9% (which isn't really the interest rate but just some arbitrary rate that determines the minimum monthly payment), people still won't be able to afford the payments. and if people keep paying those teaser rates for years, their principal will continue to grow too. they'll still be upside down.

    the best solution is to let the free-market solve this. people who can't afford their homes should not be homeowners.

    these politicians are dumba**es. they're just extending this mess for many more years.
  5. Saying we are a free market in America is just plain non-since.
  6. Why is it ok to go after wall street brokers for selling "bad" or "too risky" investment advice when investors lose money but real estate agents are allowed to sell somebody something they clearly can't afford and has an impact on the economy as a whole? Or why is it ok for a mortage lender to approve a 300K loan to a person that makes 25K a year? Where is eliot spitzer(sarcasm)?
  7. Yep yep yep, at least half the time it is because some jackass is not only in an ARM, which is bad enough....

    But they are in an interest only (or worse) mortgage...negative amortization.

    Then they have to pay the piper and the shit hits the fan.

    Problem with a 30 yr interest only (10 year interest only period for example, which is normal) is that yeah that's spiffy that you're paying $1600 a month for a $300,000 house (not including escrow).....

    then after 10 years, you don't just add in a little principal to your payment, no, you have only 20 years left in your mortgage and the entire original amount you borrowed to pay back, and see, now your payment is about $2400 instead of the $1600....

    Meanwhile, as you're living large as a high school janitor on a stated income interest only mortgage, you have a couple extra bucks lying around since your mortgage payment is so cheap, so you go rack up some more debt, since lenders see your debt to income ratio so low.

    Ruh Roh, 10 years hits your payments go up $800-900 (and that'
    s being nice and not assuming you were in a negative amortization).

    And now you're crying and asking the GUMMINT for help.

    Freezing rates and shit is NOT capitalism. They will be setting an enormous precedent on many levels by doing some fascist shit like that.
  8. if the borrowers are allowed to pay the teaser rate for the next 7 years or whatever the proposal is, aren't they in effect just renting the house?
  9. Yes, in essence.

    Problem is, not all interest only mtgs are ARMS...so the GUMMINT can't do anything about those really....

    At some point they are going to have to integrate principal into the payments....

    ARMS being frozen isn't gonna save shit. The real problem is all these dumbasses that have racked up insane amounts of debt, because lenders in general have gotten just as cavalier with their other lending as they have with mortgages.

    So really these people can't afford their mortgage payments anyway, but REEAAALLY can't afford them if they were to get any higher....that, and they're using this as an excuse for being overextended with credit...but oh no it's just the mortgage's fault that I can't pay bills.

    You should see how this shit is going down, there are average Joes I speak with every day that have an annual household income of maybe $40-50K and have $50K or more in credit card debt, on top of their mortgage and 2-3 vehicle loans and personal expense or "consolidation loans" that are trying to do a cash out refi on a house with no equity.

    A lot of the people figured they'd be slick and get into an interest only mortgage and then refinance just before the interest only period ended...problem is:

    1.Some of the folks were doing stated income loans and lying, so now when they try to refi, they can't get approved because they banks are forcing them to prove their income (which previously wasn't verified because of it being "stated income"), which is not sufficient for the mortgage payment they already have (funny huh?). So they are stuck.

    2. Many people underestimate the fact that their property value has tanked relative to what it was when they bought...Say they bought a house for $300,000 five years ago, and now they still owe $300,000 because they haven't made any principal curtailments, and now they figure they'll pull some financial James Bond shit and refinance out of the interest only....except their house is only worth $250,000 now because of oversupply. So they are stuck because most (if not all) banks now won't lend above 100% loan to value after all that just happened.

    See, fuck em. Just like if one of us bets the whole farm going long on a Crude contract or Worldcom or Euro and the trade tanks...we lose all our fucking money. No one comes in and helps offset our losses.

    That's the nature of speculation. You can lose, and lose big if you're not careful.

    Why is the mortgage market being treated so differently? IT IS THE SAME SHIT.
  10. Ah, you make it sound terrible. Say you buy a 1000 S.F. townhouse for $200,000 and you make $50,000 a year. You never pay down on the note. In 10 years, the property is then worth $300,000. Yeah, thats only $200,000 in 2007 dollars, but the fact is that you can still sell your house and pocket 1/3 of the total value of the house which is about $66,667 in todays dollars. Not bad at all. Ok...so your payment went up. But now you don't make $50,000, you make $75,000 a year. Again, not too terrible.

    When I buy houses I think of it as freezing the price in stone. And right now, I'm paying the bank back with dollars that are becoming worth less and less all the time. Not such a bad deal.

    But no...FYI, I am paying the principle on mine.

    #10     Nov 30, 2007