Wednesday, December 5, 2007

Rate Freeze Plan-Sowing the Seeds of Conflict

I am not even going to bother covering the ADP employment numbers that were released today. If anyone thinks that jobs are being created at a steady clip in construction and financial services at this point there is no talking to them. Funny thing about the number is the markets rallied strongly due to a better than expected number. Earlier in the week markets rallied in the belief that a bad number would give the FED enough cover for a 50bp rate cut next week! It's Deja Vu all over again, and I feel like its late 2000 with any data point meaning a rise in stock prices due to some kind of reasoning. Do writers and talking heads even have an idea how ridiculous they look when they flip flop on a number like this? Does anyone care? Probably not.

Rate Freeze Plan-Sowing the Seeds of Conflict
Today we got the official word that some details of the rate freeze plan that surfaced last Friday will be unveiled tomorrow afternoon. I don't know about you but I have 2 bad feelings about it already; The Government came up with it and what far reaching and meaningful plan can be made up in 2-3 weeks?
Anyways, here's the headline:
Five-Year Mortgage Rate Freeze Looms
"Wednesday December 5, 5:16 pm ET By Martin Crutsinger and Alan Zibel, Associated Press Writers
Bush Mortgage Plan Will Freeze Certain Subprime Interest Rates for 5 Years
WASHINGTON (AP) -- The Bush administration has hammered out an agreement to freeze interest rates for certain subprime mortgages for five years to combat a soaring tide of foreclosures, congressional aides said Wednesday.

Another person familiar with the matter said the rate-freeze plan would apply to borrowers with loans made at the start of 2005 through July 30 of this year with rates that are scheduled to rise between Jan. 1, 2008, and July 31, 2010
Paulson, who has been leading the effort to craft a plan, said on Monday that the program would only be available for owner-occupied homes -- to ensure the break is not given to real estate speculators."
Already we have a problem. The point of the plan was that it was going to be a blanket plan so individual workouts would not be done. How does Paulson plan to go about only applying the freeze to owner occupied units? I remember a fellow named Casey Serin that had 7 homes that were owner occupied by him, so who is going to make sure speculators are not cashing in? Maybe they will cover that detail tomorrow. Probably not.
"Under the typical subprime loan -- those offered to borrowers with spotty credit histories -- the rates for the first two years were at levels around 7 percent to 9 percent. But after two years, those rates were scheduled to reset to levels around 9 percent to 11 percent."
Again, the recent press releases keep hammering home a clearly false scenario. A rate of 7-9% is not an ultra low teaser rate. I can remember ads on the radio even 3 months ago that offered teaser rates in the 3-5% range for even seriously troubled borrowers. So why keep pushing out such false high rate numbers? Glad you asked. For the rate freeze plan to work at all, it is going to require that people paying the higher reset rates and new buyers that will have to pay higher fixed rates with stringent loan qualifications believe they are on a somewhat level playing field. I cannot stress this enough. No one in their right mind will pay 6-8% on a loan while the neighbor is frozen at a sweet 3-5% rate. New buyers, faced with paying higher rates will not offer anywhere near the same price for a home that a fixed teaser freezer has. This will result in instantaneous home price declines on a large scale. The math does not change, but one more time because I still have seen this point made in any media anywhere:
  • Teaser Freezer borrower has the rate set at 4%. He paid $300k for the home. His monthly bill is set at $1200 for up to 5 years. New (previously unfrozen) borrower can only get a rate at 8% due to new lending requirements. Heck, he may even have to put 5% down! To offer the $300k price, the new buyer will have a monthly bill of $2400, double the amount. Unless new buyer is a very special kind of fool the government hopes for in this plan, he would only offer $150k for the home, and pay the same price of $1200.

My point is that this plan is foolish and unfair for all the reasons discussed elsewhere. Moral Hazard, rewarding poor behavior, bailing out lenders that really screwed the pooch. I think an unintended consequence is going to be a real conflict between the haves (Teaser Freezers) and have nots (New buyers). Teaser Freezers will be under no pressure to lower their prices, and new buyers would be insane to step into a poor financial deal.

Another potential problem will be neighborhood anger and resentment for the Teaser Freezers. There is nothing like a moron getting a break that you cannot get because you have half a brain to make the average American extremely angry. What kind of consequences might this have?

I am assuming that because the plan is going forward, not one lawsuit is going to be filed about forced modifications from the holders of the bad mortgage paper. That would be a first in all of history, lawyers letting possible litigation get away from them! We will see how laid back the teacher union and state government pension plan lawyers are when they are informed that losses are a sure bet!

Tanta over at Calculated Risk is working on a post that will cover the details of the plan far better than I can. When it is posted, I will link to it. I am sure it will be thorough and insightful.

Mortgage Player Talk
I like to check out the hot topics over at the Mortgage Grapevine ( from time to time. I thought it would be good to see some reaction to the news today.
Thread 482381 If Feds reset and freeze rates go ahead and close shop
Some comments:

that's basically what will happen!!!
by #1stunner December 4, 2007

I disagree. Are people going to quit buying houses? Are folks not going to shed that ARM as soon as it´s feasibly possible or do you think they will just sit on it forever?The best possible conditions for a buyers market and you want to close up shop? I´d think twice about it.
by Mac December 4, 2007

Get a grip. You owe it to your family to stay calm. This is a good development. Not many will be helped by it but the media will think the problem is fixed. they will move on to Paris Hilton and you can get back to business.
by Uhhhhdel December 4, 2007

Uhhhhdel wants to get back to business without the nasty media writing about the silly loans he had been writing for the past few years! Imagine, scrutiny of lending! Too funny.

Have a good night.


Anonymous said...

please be informed that if you do not take Uhhhhdels posting off this posting, you might be sued for libel as you have no proof he wrote "silly loans"

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