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Will Freezing Subprime Mortgage Rates Help?

By JLP | November 30, 2007

I’m skeptical that freezing subprime mortgage rates is the answer to our subprime mortgage mess.

But freezing mortgage rates is exactly what the government and financial institutions are about to do, according to this front page article ($) in today’s Wall Street Journal. Here’s some of the highlights from the article:

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.

Who will be able to get “help?”

Treasury officials say financial institutions are likely to set criteria that divide subprime borrowers into three groups:

1. those who can continue to make their payments even if rates rise,
2. those who can’t afford their mortgages even if rates stay steady,
3. 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.

I wonder how many borrowers are in the second group? Also, this “fix” seems to be temporary in that the teaser rates will only be left unchanged for up to 7 more years. What happens after that? Do we care? I think eventually we’re gonna face a reckoning. Until then, it’s on with the bandaid approach.

Topics: Banking, Housing Market, Mortgages | 27 Comments »


27 Responses to “Will Freezing Subprime Mortgage Rates Help?”

  1. JGS Says:
    November 30th, 2007 at 12:27 pm

    What concerns me more than how many people fit into each category is who determines who can afford it or not. This is somewhat subjective. Additionally, if there is objective criteria established (despite the fact this is subjective), then there will be incentives to game the system. For example, if you are close to not affording it, you can take steps (ie take on more debt) to ensure you fall into the not afford it group and benefit more than it cost to put you there.

    This is simply an absurd proposal. Plus the moral hazard issue created by “bailing” people out of situations they put themself in. Personal responsibility must be brought into play. While it is clear that some people simply did not understand what they were doing, I think the majority of cases were people going into a high risk loan or stretching to afford something they otherwise could not and they lost on that gamble.

    I am upset that I am going to be paying for these people’s losses.

  2. Lazy Man Says:
    November 30th, 2007 at 1:40 pm

    JGS is right to be upset to be paying for these people’s losses. It really isn’t right for those of us who have been responsible. It simply teaches me that I shouldn’t be responsible any more and just expect these bail outs.

    I think that extending the introductory rates for 7 years will help the people in that 2nd category. Many people won’t have the same mortgage in that time. And perhaps their finances will change for the better in that time.

  3. nooney Says:
    November 30th, 2007 at 2:45 pm

    The article said:

    “In a typical case, the rate would rise to around 9.5% to 11% from 7% or 8%.”

    I thought there were a lot of ARMs out there with much lower teaser rates than 7% or 8%. If subprime borrowers get an extension of their 5% loans for 7 years, I will be angry that I couldn’t even get that rate for my 95-percentile credit score and income level. I don’t want people to lose their homes, but I am against riskier customers getting a better rate than me.

  4. Jordan Says:
    November 30th, 2007 at 3:52 pm

    So punish those who were financially responsible, and bail out those who weren’t? How is that fair?

  5. Steve Heath Says:
    November 30th, 2007 at 4:29 pm

    Could someone explain this more fully… the way it *sounds* to me is that right now Joe in California who bought the house with a teaser rate might be making monthly payments… I’m not sure who he makes the payments too exactly, but those payments are then split up and divided amongst all the SIV’s that were bought by investors/banks/etc.

    So say I’m an investment firm in Germany who holds some of those SIV’s and a lot of them have stopped making any payments because they figure “I can’t pay the higher rate, so I’m not even going to bother trying”… but now with that court ruling, the house can’t be repossesed because the investment firm doesn’t hold an actual mortgage.

    Without this law, assuming the homebuyer is honest and would continue making payments if the rate had not gone up, the homebuyer can’t figure out who owns their debt to negotiate exactly this type of procedure, so the losers are the homebuyer (unless he squats in the house after not making payments) and the shareholders/investors in the German company. And in a more general way, the community as property values drop, abandonded pools breed mosquitos, etc…

    With this law, any homeowners in that situation can, without negotiation, just keep paying that amount. The German company that can’t repossess or renegotiate (since they may only own part of the mortgage) at least has some continuous cash flow, and while they may still be losing money if they are paying out at a higher rate than they are receiving, they at least are losing less than having to write off the mortgage entirely.

  6. Weekly Roundup: Pen Name | My Dollar Plan Says:
    December 1st, 2007 at 8:45 am

    [...] Will Freezing Subprime Mortgage Rates Help? @ All Financial Matters [...]

  7. FinanceIsPersonal.com Says:
    December 1st, 2007 at 11:52 am

    The only thing this is going to do is cash-strap banks even further. If this plan were -truly- good in helping the banking industry stay a float and be good for consumers, they would do it themselvs without congress shoving it down their throats.

  8. dale siegel Says:
    December 1st, 2007 at 12:17 pm

    The fact is that is will not work. look at the “catagories” and laugh. If a borrower is in #1 or #3, they probably still should not have taken the loan out in the first place, also banged up their credit cards and will not be able make a payment at either 7% or 13%. The other fact is that in order to qualify, the borrower is responsible for proving it to the loan servicer. I can assume, the borrower is too ignorant or lazy or just incapable of putting togeter this proof so it will not happen. I can assume the lender will devise a most complicated and drawn out system used to make it available in thoery but not in practice. The government can say they they have done something! Citibank announced they expect over 35,000 forclosures on 2008. Perhaps they have under estimated this number. http://www.diariesofamadmortgagebroker.com

  9. Kitty Says:
    December 1st, 2007 at 1:54 pm

    I actually think it might work. The real estate situation may get better in the next 7 years, and they may be able to refinance to 30 year fixed. For some peeople, the income may catch up.

    Sure it is not fair. But as much as I hate my taxes being used to bail out these people, the problem is that irresponsible people aren’t the only the ones hurt. Their neighbors who have been very responsible see their property values plummet because of the number of foreclosures in the area.
    Stock values go down. Investors loose money. Banks lay off people. Technology companies that sell stuff to banks loose money. All stocks go down as a result as hedge fund investors sell everything to try to raise money to cover. The government drops rates, and we end up with cheaper dollar and higher inflation.

    This crisis affects us all, regardless how responsible we are. My home is all paid, mostly because of money I made on this bubble. Still, I don’t think for a moment that this crisis doesn’t affect me.

  10. » Roundup: Happiness! XBox 360 Has Returned! on Blueprint for Financial Prosperity Says:
    December 1st, 2007 at 8:25 pm

    [...] JLP talks about freezing subprime loans. [...]

  11. dimes Says:
    December 1st, 2007 at 10:38 pm

    So they extend the lowered rates time, then what? Raise them higher? Extend the loan to a 40 year mortgage? How is this stuff ever going to be paid back?

    I’m with JGS in that it’s going to be too hard to prove who can or can’t afford a higher payment. If I could lie to keep a lower rate on my repay, I would definitely do it.

  12. Swim Upstream to Wealth Says:
    December 2nd, 2007 at 12:30 pm

    This just delays the inevitable. Plus, the Collateralized Debt Obligation (CDO), where these subprime loans ended up, will drop like a rock as investors sell these since they are expecting higher payouts. The Treasury claims these investors won’t mind because a smaller payment is better than no payment, but this is a fallacy. They will be able to get more return in Treasuries so they will flee.

    Plus, I agree with the general consensus that this creates a moral hazard and punishes financial responsibility. If I owned a subprime loan, I might be tempted to default so I could fall into the third group that gets a freeze.

  13. Tim Says:
    December 2nd, 2007 at 1:18 pm

    the problem is, even if you freeze rates for one year, those who couldn’t afford in the first place and shouldn’t have gotten the loan is only delaying the inevitable. group 3 are borderline people where the inevitable would just be delayed. it’s simply stupid. they should just let everything happen rather than delaying the inevitable.

  14. Tim Says:
    December 2nd, 2007 at 1:20 pm

    the problem is, even if you freeze rates for one year, those who couldn’t afford in the first place and shouldn’t have gotten the loan is only delaying the inevitable. group 3 are borderline people where the inevitable would just be delayed. it’s simply stupid. they should just let everything happen rather than delaying the inevitable. besides, everyone deserves to lose their homes if they couldn’t afford it to begin with.

  15. Financial News Around the World » Blog Archive » Will Freezing Subprime Mortgage Rates Help? Says:
    December 2nd, 2007 at 1:48 pm

    [...] Read the rest of this great post here [...]

  16. mbhunter Says:
    December 3rd, 2007 at 1:50 am

    This is just subsidizing the stupid and the greedy.

  17. Roundup for week of 25 November 2007: Dyson Animal edition at Mighty Bargain Hunter Says:
    December 3rd, 2007 at 4:10 am

    [...] All Financial Matters wonders if freezing subprime mortgage rates will help those in trouble.  I’m on board with JLP here. [...]

  18. Projoe1979 Says:
    December 3rd, 2007 at 9:47 am

    Sounds like something we need to call our congressmen about…. hahahahahaha

  19. swarner Says:
    December 6th, 2007 at 2:10 pm

    I can understand what everyone here is saying but have they taken into consideration the people who are responsible and due to life’s circumstances have ended up in a negative situation. ie: illness, returning to school to better their financial situation. I have a friend who returned to nursing school and had to survive on one income during school which created a financial burden. After graduating she wanted to refinance to a fixed rate. Now that the housing market has dropped she can not refinance due to the decreased value of the home. There are many people that land in situations that they don’t expect to be in. People should not judge unless they know the entire situation. mbhunter writes “This is just subsidizing the stupid and the greedy”. NOT ALL PEOPLE ARE STUPID AND GREEDY, but some people are extremely ignorant.

  20. Toronto realtor Says:
    December 7th, 2007 at 9:37 am

    I don’t think that the people with subprime credits are stupid, but it is true, that they should be aware of the fact, that there was the possibility mortgage rates will risind and the value of their house will decrease, moreover if they earning was already very low at that time. That’s why I cannot agree with mortgage freezing, because it is not fair to other home owners.

    Beside that, experts says, that the mortgage freezing will do nothing to help those people who are currently iliquid and are facing foreclosure auctions.

  21. David Says:
    December 9th, 2007 at 6:30 am

    Does this not allow the “bank” holding the note not record a the unknown loss?

    Is the property value changed ?

    Why not surrounding land owners press for property tax reduction across the board!

    Force the flipper/investors into a different loan packages from home owners.

  22. FlimFlam Says:
    January 17th, 2008 at 9:03 am

    The problem is a lack of personal responsibility. The bankruptcy code still allows the defaulters to walk away from their debts. What we need is a change to the law to allow for creditors to garnish wages for the LIFETIME of the debtor deadbeats that are defaulting. Forced organ harvesting might also help the deadbeats to meet their contractual obligations.

  23. eR0CK Says:
    January 23rd, 2008 at 10:14 pm

    Government exists to protect us from each other. Where government has gone beyond its limits is in deciding to protect us from ourselves.

    -Ronald Reagan

  24. Rosalyn Durham Says:
    March 8th, 2008 at 7:11 pm

    Re: Flim Flam; January 23, 2008

    Garnish wages for a lifetime? Forceed organ harvesting? I think that bad financial decisions should not result in a lifetime sentence for anyone. And, organ harvesting because some people aren’t financially savvy or possible greedy? What happened to Flim Flam in his/her childhood. Either Flim Flam is alcoholic and/or sociopathic with a psychopathical edge. What a cruel, cruel, person.

  25. Johnny Bricks Says:
    May 22nd, 2008 at 3:04 am

    I see a lot self righteous people here complaining about people whose loans are going up and getting bailed out and how it is costing them money, first off not many are going to get bailed out secondly what was there teaser rate I know mine was 9.9% most of you would pee yourselves and pass out if you were offered a rate was that high.

    But if your credit took a hit due to a divorce or sickness you took it on a 2-28 knowing you could make these payments and build your credit back up so when the time came to refinance you could get a better rate.

    But the banks changed the rules along the way they dropped just about all of the programs they used to get these people into there homes to begin with and now even if your credit has risen and payments to every one of your creditors has been made on time you cannot get refinancing so you are at the Mercy of a bank who will raise your percentage rate 2 points every 6 months until it reaches its peak and that is what is happening here.

    So please do not think that a lot of these people have low mortgages at your expense because the majority of their percentage rate are much higher than you could imagine.

    I’m currently at 11.7 percent luckily I can afford it but trust me if I couldn’t in the months that it would take the bank to foreclose I would gut this house right down to the copper electrical wire and sit back and relax while watching the watching the wall studs burn in the fire place.

    Let the banks repo a few thousand homes in that condition just to see how far their greed will get them.

  26. Kelsey Says:
    June 12th, 2010 at 3:00 am

    The post is very informative. Thanks for the post.

  27. Debra Says:
    December 29th, 2010 at 3:30 am

    Obviously, the tricked consumers were not the only ones tricked – the investors were also raped. Foreclosure fraud is HUGE and I’m waiting for banksters to be lead away in handcuffs.

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