Move by Bush could freeze rates for 5 years on some adjustable loans.
Brian J. O'Connor
The Detroit News December 6, 2007
Reports out of Washington say the Bush administration today will announce a deal with large mortgage lenders that will freeze payments on some subprime home loans for five years.
Congressional aides who leaked details of the plan say it freezes payments on some risky, adjustable-rate loans, but only if the borrowers are up to date with their payments.
Some analysts say it could do more harm than good.
The plan could stem some of a feared wave of foreclosures poised to strike the real estate, housing and credit markets within months. But it also may tighten credit for home buyers, create more losses for investors and extend the uncertainty wracking credit markets, notes Greg McBride, senior financial analyst at www.Bankrate.com.
"It cushions the blow to the economy in the short term," McBride said Wednesday. "But it raises a lot of questions and potential problems."
The plan -- cobbled together by Treasury Secretary Henry Paulson and other banking regulators and banks, mortgage investors and consumer groups -- aims to forestall damage to the already weakening U.S. economy when payments on an estimated 2 million adjustable-rate mortgages begin increasing next year.
Reports from the Associated Press on Wednesday said the rate-freeze plan would apply to subprime borrowers who are current on loans made at the start of 2005 through July 30 of this year, with rates scheduled to reset between Jan. 1, 2008, and July 31, 2010.
The freeze won't apply to prime borrowers; those who can afford to refinance; and those who are past-due on their loans. The freeze would be limited to owner-occupied homes, to avoid bailing out real-estate speculators.
The strategy seems intended to let the turmoil in the real estate market subside so that home values can level off, allowing borrowers to refinance or sell. In many cases, homes purchased at the peak of the market now are worth less than the amount owed.
That makes refinancing impossible for many borrowers, leaving them to tighten their budgets if they can, declare bankruptcy or simply walk away rather than selling their homes at a loss. The result is more homes dumped on a glutted market, or consumers so stretched to make payments that they curtail other spending. Already Detroit's Big Three automakers say their sales are slumping because of the mortgage crisis. While the plan may create temporary breathing room for some homeowners, it's likely to drive lenders out of the sub-prime market and maybe out of mortgage lending altogether, Bankrate's McBride warns.
Only about 20 percent of subprime loans are in default now, he notes. That means a lot of borrowers are paying on time and might be able to keep paying when their rates go higher. But a blanket freeze on all subprime loans means investors will lose out on those profits. They'll think twice about making any more loans if they fear the government will jump in and rewrite the terms.
"We need more liquidity in the mortgage market, not less," McBride said. "The unintended consequences could be tighter credit and higher interest rates for everybody -- not just subprime borrowers."
Comerica Bank Chief Economist Dana Johnson said he fears other fallout from the plan. Besides driving out many subprime lenders, the move will prematurely patch the bursting real estate bubble in inflated markets such as California and Florida.
"Freezing the whole situation probably just delays those necessary adjustments," Johnson said.
The rate freeze also may just extend the uncertainty of investors who bought bonds and other instruments based on packages of subprime loans. Their concerns about just how many of the underlying loans will go bad roiled the international credit markets this summer and sent the stock market plummeting.
Fears that the loans that keep businesses and the economy running were drying up prompted the Federal Reserve to lower interest rates twice and infuse millions of dollars into capital markets to keep credit flowing.
Investors were facing a day of reckoning next summer, when they'd discover just how many loans would go bad and how big their losses would be. But a mortgage rate freeze means they could wait as long as another five years to get to the bottom line.
"What the credit market needs to sort out is, what is the value of these incredibly complex products and who's going to take the losses?" Johnson said. "This is not addressing that issue."
Also not addressed: The number of prime-rate borrowers who have adjustable-rate loans that could put their mortgage payments out of reach, too, as well as borrowers who have fallen behind but still want to make good before they lose their homes outright, says Harry Glanz, co-founder of Capital Mortgage Funding in Southfield.
"It's easy to help people who are current and have a great track record," Glanz said. "It couldn't hurt. But how many people are in that situation?"
Brian J. O'Connor
The Detroit News December 6, 2007
Reports out of Washington say the Bush administration today will announce a deal with large mortgage lenders that will freeze payments on some subprime home loans for five years.
Congressional aides who leaked details of the plan say it freezes payments on some risky, adjustable-rate loans, but only if the borrowers are up to date with their payments.
Some analysts say it could do more harm than good.
The plan could stem some of a feared wave of foreclosures poised to strike the real estate, housing and credit markets within months. But it also may tighten credit for home buyers, create more losses for investors and extend the uncertainty wracking credit markets, notes Greg McBride, senior financial analyst at www.Bankrate.com.
"It cushions the blow to the economy in the short term," McBride said Wednesday. "But it raises a lot of questions and potential problems."
The plan -- cobbled together by Treasury Secretary Henry Paulson and other banking regulators and banks, mortgage investors and consumer groups -- aims to forestall damage to the already weakening U.S. economy when payments on an estimated 2 million adjustable-rate mortgages begin increasing next year.
Reports from the Associated Press on Wednesday said the rate-freeze plan would apply to subprime borrowers who are current on loans made at the start of 2005 through July 30 of this year, with rates scheduled to reset between Jan. 1, 2008, and July 31, 2010.
The freeze won't apply to prime borrowers; those who can afford to refinance; and those who are past-due on their loans. The freeze would be limited to owner-occupied homes, to avoid bailing out real-estate speculators.
The strategy seems intended to let the turmoil in the real estate market subside so that home values can level off, allowing borrowers to refinance or sell. In many cases, homes purchased at the peak of the market now are worth less than the amount owed.
That makes refinancing impossible for many borrowers, leaving them to tighten their budgets if they can, declare bankruptcy or simply walk away rather than selling their homes at a loss. The result is more homes dumped on a glutted market, or consumers so stretched to make payments that they curtail other spending. Already Detroit's Big Three automakers say their sales are slumping because of the mortgage crisis. While the plan may create temporary breathing room for some homeowners, it's likely to drive lenders out of the sub-prime market and maybe out of mortgage lending altogether, Bankrate's McBride warns.
Only about 20 percent of subprime loans are in default now, he notes. That means a lot of borrowers are paying on time and might be able to keep paying when their rates go higher. But a blanket freeze on all subprime loans means investors will lose out on those profits. They'll think twice about making any more loans if they fear the government will jump in and rewrite the terms.
"We need more liquidity in the mortgage market, not less," McBride said. "The unintended consequences could be tighter credit and higher interest rates for everybody -- not just subprime borrowers."
Comerica Bank Chief Economist Dana Johnson said he fears other fallout from the plan. Besides driving out many subprime lenders, the move will prematurely patch the bursting real estate bubble in inflated markets such as California and Florida.
"Freezing the whole situation probably just delays those necessary adjustments," Johnson said.
The rate freeze also may just extend the uncertainty of investors who bought bonds and other instruments based on packages of subprime loans. Their concerns about just how many of the underlying loans will go bad roiled the international credit markets this summer and sent the stock market plummeting.
Fears that the loans that keep businesses and the economy running were drying up prompted the Federal Reserve to lower interest rates twice and infuse millions of dollars into capital markets to keep credit flowing.
Investors were facing a day of reckoning next summer, when they'd discover just how many loans would go bad and how big their losses would be. But a mortgage rate freeze means they could wait as long as another five years to get to the bottom line.
"What the credit market needs to sort out is, what is the value of these incredibly complex products and who's going to take the losses?" Johnson said. "This is not addressing that issue."
Also not addressed: The number of prime-rate borrowers who have adjustable-rate loans that could put their mortgage payments out of reach, too, as well as borrowers who have fallen behind but still want to make good before they lose their homes outright, says Harry Glanz, co-founder of Capital Mortgage Funding in Southfield.
"It's easy to help people who are current and have a great track record," Glanz said. "It couldn't hurt. But how many people are in that situation?"
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