A Little More on the ARM Teaser Rate Freeze

Every article gives a little more information about the ARM teaser rate freeze being pushed forward by Secretary Hank Paulson. Now they are suggesting using tax-exempt bonds to re-finance some of the mortgages. The article below is interesting because the full text makes the teaser rate freeze seem much more political. Text in bold is my emphasis. From the WSJ:

By the way, if you go to the original article at the online version of the WSJ you get to vote as to whether or not you think the teaser rate freeze is a good idea.

With two million borrowers in the U.S. expected to see interest rates jump on their adjustable-rate mortgages in the next two years, Treasury Secretary Henry Paulson urged the Democratic-controlled Congress to pass stalled housing legislation and support a new White House proposal to use tax-exempt bonds to refinance troubled subprime mortgages.

After months of criticism that he hasn't responded aggressively enough, Mr. Paulson implied that the administration was already doing all it could to stem the nation's mortgage woes, which have roiled markets, threatened many homeowners and raised the risk of recession. The secretary hopes the mortgage industry will announce this week an interest-rate freeze on certain ARMs.

Privately, Treasury officials say they don't have any major home-loan-relief initiatives in the works beyond those they have already aired.

Mr. Paulson's comments came as the president of the Federal Reserve Bank of Boston suggested in a speech that more than half of homeowners with subprime ARMs may be qualified to refinance into a less-costly loan by taking advantage of programs already available.

Boston Fed President Eric Rosengren said that 55% of borrowers with subprime ARMs for owner-occupied homes -- about 1.2 million homeowners -- haven't missed a mortgage payment in the past year. It is far from clear, though, that all of them could actually secure new mortgages. Some homeowners may have trouble refinancing, for example, because sharp declines in home prices have left them owing more than their houses are valued at.

Boston Fed research shows that 20% of borrowers with subprime ARMs nationwide should be able to refinance "relatively easily" into a prime mortgage or get into a loan-guarantee program, Mr. Rosengren said. At the time they took out their original loans, this 20% of subprime borrowers had relatively good credit scores, held at least 10% equity in their homes, provided full documentation of their income and assets and said they planned to live in the home.

In an interview, Mr. Rosengren said some borrowers with relatively good credit may have been steered into a subprime loan because it was more profitable for the lender. Other borrowers "who might have been considered prime based on their credit score" wound up in subprime loans because they didn't have adequate funds for a down payment, didn't wish to document their income or assets or wanted to buy a home that was more expensive than they could have qualified for, a Boston Fed study found.

Interest rates on as much as $362 billion in subprime home mortgages are expected to rise in the coming year, according to Banc of America Securities.

Treasury officials are urging the mortgage industry -- including lenders, loan-servicing companies and investors who own mortgage-backed securities -- to finalize a sweeping plan to freeze subprime interest rates. Mr. Paulson initially resisted such a proposal, but he has recently embraced it as the centerpiece of a market-based administration approach that also includes outreach and counseling for potentially struggling borrowers.

At the same time, Mr. Paulson, speaking at a Washington housing forum sponsored by the Office of Thrift Supervision, called on Congress to authorize state and local governments to issue more tax-exempt bonds over the next three years and use the proceeds to help strapped homeowners.

Even as the administration prods lenders to help troubled borrowers, Fannie Mae and Freddie Mac announced additional fees, or surcharges, that will raise the cost of some new mortgage loans. The surcharges, likely to be passed on to consumers, will affect certain loans purchased or guaranteed by the two government-sponsored mortgage companies after March 1. Some lenders already are starting to apply them, said Lou Barnes, a mortgage banker in Boulder, Colo.

The surcharges affect mortgage borrowers who have credit scores below 680, on a standard scale of 300 to 850, and who are borrowing more than 70% of the property's value. For instance, someone with a credit score of 650 would pay a surcharge of 1.25% of the loan amount for a mortgage to be sold to Fannie. On a $300,000 loan, that would mean extra fees of $3,750 for the borrower. That could be paid in cash or in the form of a higher interest rate than would normally apply.

Fannie and Freddie said they need to charge extra to reflect higher default risks, caused partly by falling home prices.