The Duration of the Interest Rate Freeze Looks Like Five Years

As time goes on more details are being leaked concerning the ARM teaser rate freeze. It is beginning to look like the duration of the freeze is going to be about five years. Also there is a lot of talk to make sure the bond holders are kept relatively whole and the threat of lawsuits is minimized. However, with all that said somehow I don't think the horse trading is over.

Also I still have not figured out who will pay for all this. I wonder if it will translate into higher application fees or interest rates for new mortgage applicants? Text in bold is my emphasis. From Bloomberg:

Federal regulators and U.S. lenders are focusing on five years as the duration of an interest-rate freeze on subprime mortgages, said a person familiar with negotiations aimed at fending off a jump in foreclosures.

Such an agreement would satisfy the shortest fix sought by the Federal Deposit Insurance Corp. That period is longer than the minimum, two- to three-year modifications suggested by Fannie Mae, the largest source of finance for American home loans. The Treasury Department's Office of Thrift Supervision advocated between three and five years.

``Fixing the reset period is an important action, and it's good that everyone now seems to be pushing in the same direction,'' said Michael Barr, a professor at the University of Michigan Law School and a former aide to Robert Rubin, who was President Bill Clinton's Treasury secretary from 1995 to 1999. ``Now the question is what additional steps are required to keep people in their homes and avoid foreclosures.''

Treasury Secretary Henry Paulson is finalizing the deal as the housing recession enters a third year, threatening the economic expansion. President George W. Bush and Paulson may announce the plan tomorrow, said two people familiar with talks. An administration official said on condition of anonymity that Bush will speak tomorrow on housing, without confirming details.

Officials and company executives spent much of the past week negotiating over how long to extend starter rates on subprime mortgages, which are usually given to people with poor or incomplete credit histories.

Representative Adam Putnam of Florida, the chairman of the House Republican Conference, said yesterday his interest in Paulson's efforts rose since he got calls from Florida officials about a state investment pool for local governments hit by debt downgrades. The state board froze withdrawals Nov. 29 to stem a run on assets. Rising mortgage defaults spurred billions of dollars in losses on securities backed by the loans.

``Florida in general increases my thinking that we need to look at the reasons to help mitigate the subprime meltdown,'' Putnam said.

Other Republicans expressed skepticism today.

``My biggest concern is that there are a lot of Americans who are making their mortgage payments, they are current, and the benefit won't go to them,'' Representative Spencer Bachus, the top Republican on the House Financial Services Committee, told reporters after the meeting with Paulson today.

One challenge will be to craft a deal minimizing lawsuits from investors in bonds backed by the mortgages being rewritten, analysts said. The longer that lower rates are extended, the more risk posed to the bonds' values. Republican Representative Mike Castle of Delaware has proposed legislation offering a ``safe harbor from legal liability'' to mortgage servicers.

``Within the contracts, there is room for the servicers to work with borrowers to minimize the loss for the investor,'' said Wayne Abernathy, executive director of financial- institutions policy at the American Bankers Association in Washington and a former Treasury assistant secretary.

About 100,000 subprime loans will jump from their discounted initial rates every month for the next two years, UBS AG estimates. American home foreclosures almost doubled in October from a year earlier as subprime borrowers failed to make higher payments on adjustable-rate mortgages, Irvine, California-based RealtyTrac Inc. said on Nov. 29.

These mortgages usually begin with a rate of 7 percent to 9 percent and then reset to between 11 percent and 13 percent. ``What we are talking about is having these loans modified, so they continue for a longer period of time at the starter rate,'' John Reich, director of the Office of Thrift Supervision, said in an interview in Washington Dec. 3.

Paulson and Fed Chairman Ben S. Bernanke are concerned that falling home values will choke consumer spending, which has driven economic growth since the last recession ended in 2001. By heading off further deterioration in the $11.5 trillion mortgage market, officials are also aiming to stem losses on securities backed by subprime loans.

Paulson said in his speech that the government is focused on helping subprime borrowers who can afford the introductory mortgage rate but not the adjusted one. The plan ``does not, and will not, include spending taxpayer money on funding or subsidies for industry participants or homeowners,'' he said.