Rate Freeze Plan Came During a Brain Freeze
Where to start? I guess with the headline and snippets (from WSJ):
U.S., Banks Near A Plan to Freeze Subprime Rates
By DEBORAH SOLOMON and MICHAEL M. PHILLIPS
November 30, 2007; Page A1
WASHINGTON -- 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, according to people familiar with the negotiations.
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.
Many subprime loans carry a low "teaser" interest rate for the first two or three years, then reset to a higher rate for the remainder of the term, which is typically 30 years in total. In a typical case, the rate would rise to around 9.5% to 11% from 7% or 8%. That would boost an average borrower's payment by several hundred dollars a month.
First off, details are still "being worked out"? But the total package will be ready for announcement next week? Someone rushing a bit?
Second, I do not know where the writer got their figures, but whoever heard of a 7-8% introductory "teaser rate" in the last 4 years? I have never seen an ad or commercial advertising "start at a low 8%". The teaser programs I have seen were in the realm of 2-4% starting rate with the fully indexed rate jumping to 8-10%. That's is a huge difference and it seems the article is trying to lay ground work along the lines that the jump is even close in number. The problem right now is not an extra 2% on a mortgage, its an extra 5% that foolish people thought would never happen.
"Among the holdouts have been investors, who typically hold securities backed by mortgages. If interest rates are frozen, they would lose the potential benefit of higher payments. But investors have cautiously moved toward cooperation, likely on the grounds that it's better to get some interest than none at all.
At a meeting at the Treasury Department yesterday, coalition members told Mr. Paulson and other regulators that they are on track to announce the new industry guidelines by year's end, according to a senior Treasury official. Among those attending were representatives of Wells Fargo, Washington Mutual, Citigroup and the American Securitization Forum, a group whose members issue, buy and rate securities backed by bundles of mortgages.
"There has been a convergence of thought on this," said William Ruberry, spokesman for the Office of Thrift Supervision, which is also involved in the discussions."
Well I for one will sleep so much better tonight knowing the same imbeciles that brought this mess in the first place now have a "convergence of thought". You cannot make up comedy like this, it can only come naturally.
"Treasury officials say financial institutions are likely to set criteria that divide subprime borrowers into three groups: those who can continue to make their payments even if rates rise, those who can't afford their mortgages even if rates stay steady, and those who could keep their homes if the maturity date of their mortgages were extended or the interest rates remained at the teaser rates. Only the third group would be eligible for help."
The sheer lunacy of the three group model is astounding. If you can pay more than some other fool, you will. If you cannot pay at all, bye bye. If you can pay at the low teaser rate, it will be fixed for maybe 5 years at that rate. Again, too funny. Who decides who can pay what? If I could pay more, I would now start to fall behind or some enact some financial distress to qualify for the freeze program!
Read the few articles out about this plan for yourself. There should be a few problems that jump right out at you that somehow the planners either did not see or think are not problems that are too bad.
Market for Adjustable Rate Loans Effectively Finished Immediately
If the government can step in and reset securities when they want to, there are two problems:
- No investor group will ever (I mean Never) buy any product related in any way to adjustable mortgages. This will kill off a huge swath of entry buyers, and the housing market will rapidly collapse due to lack of funding
- I woke in what I thought was the US, but as the day wore on I realised the Ruskies had won the cold war and we are communists.
Banks and Lenders are OK with Taking Massive Losses? Try Again!
Implicit with this plan is that the losses from the modified loans can be taken by the banks. That's a good one. The government obviously has some kind of major bailout plan for the lenders and holders of the fantasy paper. Where's that money going to come from? Printing presses of course! What that means for foreign investment and the dollar is probably not good long term. And again, this will stop mortgage lending almost immediately to all but the most qualified buyers.
Revenge of the Monthly Payment Mindset
This is the most important thing that jumped out at me thinking about this dumb move. We have gone over the "monthly payment" mindset that is the US consumer. The US consumer is also a jealous, competitive type to boot. Consider the following example that I have used before:
- Person A-has a frozen teaser rate of 4% on a $300K home. The mortgage is $1200 monthly.
- Person B-looking to buy a home. Due to new high lending qualifications and higher rates charged by the banks due to losses, his rate will be 8%. To buy the home at $300k, his payment will be an astounding $2400!!!!!
Now who in their right mind is going to rush up to the buying window with that ridiculous deal? The prospective buyer should only pay the same amount, and that means the new home price just became $150k. A 50% decline in an instant. If you are considering buying a home, and considering paying through the roof for the foolishness of others, you deserve your fleecing. With the Internet and all the information available, I envision people are going to be doing this kind of math and reaching the same conclusion.
Folks, we have reached a point now where things are going on that are so reckless and so ill conceived that something needs to be done. A poll on CNBC is showing over 80% of respondents are against any type of freeze program! Why is it so hard for all involved to simply see what needs to happen, and let it happen? The world will not end. The galaxy will continue to rotate. The grunions will continue their yearly spawning run. What's the big F##ing deal with a housing bust?
The only answer I can seem to find that makes sense is that the powers that be know the charade of the banking system requires the concept of "suspension of disbelief", and the housing bust will serve as the pin to pop the illusion. The Freeze program is outrageous and requires a total immersion in fantasy to even consider. The fact that the government, the banks, and the FED all support this plan says so much about how sorry this country has become in short order. Sorry for the especially nasty tone tonight, but I am disappointed and angry that it has come to this.
It is Friday, and I did not receive any rock blogging ideas in the comments, so I guess its my choice!
I am a slave to 80's glam rock. I love it and I am not ashamed!
Dokken "Alone Again Without You" amazing vocals, great power ballad:
Cinderella with "Nobody's Fool", fitting for today's news!
Poison with "Fallen Angel" the guitar solo is one of the best in all of Glam rock:
Have a good night!