Hallelujahs were heard up and down Wall Street on Friday- homeowners and lenders were to be saved by a new plan to freeze mortgage resets:
The Dow and S&P 500 rose yesterday, capping a dismal November with a four-day rally, as U.S. financial stocks rallied on optimism over a proposed rescue for struggling homeowners and on heightened expectations for more interest-rate cuts by the U.S. Federal Reserve.
Banks and mortgage lenders were the standouts following a report that the U.S. Treasury will soon unveil a plan to help some homeowners facing foreclosure in the subprime mortgage crisis.
The operative word here as far as I’m concerned is "some." Just what percentage of mortgages will be affected by this plan?
According to Reuters:
Details over which mortgages would be considered for an automatic interest rate freeze of five to seven years are still sketchy. The source said that initially, only subprime loans with two- or three-year periods of low "teaser" rates would be considered, but more traditional subprime loans with longer fixed-rate periods could also be modified.
Deutsche Bank said in a report on Friday that the population Paulson’s plan is aimed at — owner-occupants with at least some equity and facing their first reset — comprises 1.2 million loans valued at $258 billion, or one third of outstanding "first-lien" subprime loans.
So what percentage of the total market is "first-lien" subprime loans? According to Ben Bernanke back in May of this year, About 7-1/2 million first-lien subprime mortgages are now outstanding, accounting for about 14 percent of all first-lien mortgages. So if this plan affects one-third of 14% of the market, this plan should affect less than five percent of outstanding loans. However, according to Global Insight, at the end of 2006, the share of ARMs in total mortgages outstanding rose sharply over the business cycle, reaching perhaps 25–30% by the end of 2006.
So in spite of comments by perma-bulls like Cramer who said that the bottom is now in as there will be no more resets, in reality it appears to me that at best, this bailout might freeze around one in six ARMs from resetting. The plan, however, will not be able to prevent ANY home values from falling, which means that the risk of loans defaulting remain high.
Wall Street might be singing the Hallelujah Chorus, but they should be singing, "Too much, too little, too late."
