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."
The plan, however, will not be able to prevent ANY home values from falling
This is key. I’d actually go one farther and say that it will put more downward pressure on prices. What investor in their right mind would consider these securities if they know that big brother can swoop in and change the terms whenever he wants? I’m not just talking subprime papers, this will instantly affect the entire chain, top to bottom.
On another note, I haven’t heard if these agreements will also postpone the onset of principal payments. Rate increases were only half the battle, and if this doesn’t affect principal payments then I’d say that the effectiveness of the program will be far less than they think.
Another futile attempt to bail out the boys on Wallstreet. The housing market may be bad or even terrible but it’s small potatoes compared to what’s happening in the securities market’s.
In the spirit of the season I don’t think Mr. Scrooge will be too happy when you try and change the terms of his note. Will he invest more money in them? I think not.
It’s already too late for the first wave of resets. Methinks this is really aimed at the second wave of resets that would otherwise start next year, comprised overall of a more affluent mix of borrowers who still bought homes they couldn’t afford.
If allowed to go forward, this will not only reward the irresponsible and punish those of us who waited to buy something we could actually pay for, it will likely have serious long-term negative effects on mortgage availability and foreign investment here. (See my comment to the Friday thread.)
Wow. 2008 is going to be even rougher.
This is insane. The rate on my PR is set to adjust in June, 2008. We lost over $700,000 in bad apartment investments last year. I had planned to refinance my 4.75%, 5-year ARM. With all of the publicity about calling your lending institution (PHH, in my case) and asking for a freeze, I think I’ll do this as an experiment and find out what it’s really all about.
“Overcoming Real Estate Losses” at http://WhineCountryRealEstate.blogspot.com/
If this is an effort to keep prices high, then less people will qualify for loans and even greater unemployment will result. This in itself along with all the other adverse factors affecting the economy will cause greater decreases in home prices. The ironic fact is that home prices need to come down to prices that support fundamentals of a person(s) ability to actually make payments (i.e. 3X annual income per mortagage.
As far as I can tell none of these lawmakers are actually putting any teeth in any of this. They are just announcing “agreements”. What we need is significant government involvement.
Let’s say a new law that forces real estate agents to cover any losses in the first 5 years after I buy a place if I spend more than 3X my W-2 income!
The more they attempt to “price fix” the market the faster this will fall. It’s bad to price fix consumables like milk and gas… It’s really really bad to price fix a depreciating asset that requires debt. Really really bad… No really.. it’s a bad idea
Why do I feel like killing a banker?
http://bankingpanic.blogspot.com/2007/12/no-hope-for-hopenow.html