Discussions About Freezing the Teaser Rates for Certain ARMS are in Progress

Discussions are underway to temporarily freeze the teaser rates on ARMs for a a certain class of borrower. The purpose of these discussions is to reduce the number of foreclosures in 2008. This will have some effect on shoring up the housing market. But, just look at the housing inventory overhanging the market, that still has to be dealt with. A couple of comments are in order:

1. Is this going to go the way of M-LEC where everyone discusses it but nothing happens?

2. What about the person that can pay the adjusted payment, is this going to penalize a person that can pay his bills?

3. The housing market in the US is collapsing. Allow it to collapse, it is not the end of the world. If we meddle in the markets it will either make it worse, or make the effects last longer, or both.

4. Is this being done to cut the losses at the banks?

However with all that said, what are the value of these comments if things are much worse than anyone is letting on? I would say if things are much worse than we think, the comments go by the way side except #2.

Text in bold is my emphasis. Text in italics is the original article. From the WSJ:

An accord could reassure investors and strapped homeowners, both of whom are anxious as interest rates on more than two million adjustable mortgages are scheduled to jump over the next two years. It could also give a boost to the Bush administration, which is facing criticism for inaction amid the recent housing turmoil.

The plan is being negotiated between regulators including the Treasury Department and a coalition of mortgage-related companies including Citigroup Inc., Wells Fargo & Co., Washington Mutual Inc. and Countrywide Financial Corp. People familiar with the talks say the individual members have agreed to follow any agreement reached by the coalition, which is called the Hope Now Alliance. (Really, if the bank does not go along how do you think their next bank exam by the OCC, the Fed, FDIC, or whomever examines them will go.)

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.

Exactly which borrowers will qualify for the freeze and how long the freeze would last are yet to be determined. Under one scenario, the freeze could run as long as seven years. The parties are developing standard criteria that would determine eligibility. The criteria should be finalized by the end of year.

Mortgage servicers -- the companies that collect loan payments -- are a key part of the coalition, because they are the companies that deal directly with borrowers. Often the servicer is different from the company that originally made the loan. Citigroup and Countrywide are among the nation's biggest mortgage servicers. The mortgage servicers in the coalition represent 84% of the overall subprime market. The coalition also includes lenders, investors and mortgage counselors.

The Bush administration has been looking for ways to stem the fallout from the mortgage crisis. Treasury Secretary Henry Paulson and Housing and Urban Development Secretary Alphonso Jackson helped assemble the coalition so that government officials could have a single counterpart with which to discuss terms of a plan. (How bad could the mortgage crisis be if President Bush has to get involved. I would say pretty bad.)

While the government can't force the industry to modify loans, Mr. Paulson and other administration officials have been using moral suasion to push for workouts, telling the companies it is in their interest to avoid foreclosure since most parties can lose money when that happens. A similar plan to freeze interest rates temporarily was recently announced by California Gov. Arnold Schwarzenegger and four major loan servicers, including Countrywide.
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.

A spokeswoman for the American Securitization Forum, which earlier resisted a broad approach to changing loan terms, said: "We support loan modifications in appropriate circumstances and are working to establish systematic procedures to facilitate their delivery."

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 creditors are likely to look at whether the borrowers have equity in their homes, despite falling house prices, and whether their incomes are holding steady.

Mr. Paulson, who is philosophically opposed to federal meddling in markets, at first rejected a sweeping approach to loan modifications when the idea was floated by Federal Deposit Insurance Corp. Chairwoman Sheila Bair. But he shifted his position recently. He told The Wall Street Journal last week that it would be impossible to "process the number of workouts and modifications that are going to be necessary doing it just sort of one-off."

(Hmmm! The FDIC suggested this. They usually don't take the lead on this sort of issue unless there is a problem at the banks.)

As a drumbeat of bad news about housing has continued -- including news of fewer home sales, falling prices and higher foreclosures -- the Bush administration has come under pressure to be seen as actively addressing the problem.

Officials in Washington have been cautious about steps that would be seen as rescuing borrowers, lenders and investors from the consequences of their own bad decisions. That is why few are suggesting direct support for borrowers who can't afford their loans. Mr. Paulson has decided his best option is to prod the markets to sort matters out themselves, as long as companies bear in mind the public interest in keeping people in their homes. "There's not some silver-bullet piece of legislation out there," a senior Treasury official said.

"If I ever saw a role for government, it is...to bring the private sector together when innovation has really outrun our ability to deal with it," Mr. Paulson said. He is expected to talk about the administration's approach to the housing crisis at a conference Monday.

Interest rates are set to reset next year on $362 billion worth of adjustable-rate subprime mortgages, according to Banc of America Securities. An additional $85 billion in such mortgages is resetting during the current quarter. The estimates include loans packaged into securities and held in bank portfolios.

Borrowers whose loans are resetting are likely to have a tougher time sidestepping the rising payments by refinancing or selling their homes. Lending standards have tightened and many borrowers can't qualify for refinancing. And falling home prices mean that many borrowers have little or no equity in their homes. Some owe more than their homes are worth.

Top Treasury officials fear that unless creditors agree to relax the terms on many of those mortgages, borrowers will default at a higher pace. About 6.6% of subprime mortgages were in foreclosure as of August, the most recent data available, according to First American LoanPerformance.