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Sunday, December 9, 2007

Reviews are Poor for White House Mortgage Plan

Items of Interest:

Mark Lieberman, Senior Economist / Fox Business:
Unintended Consequences of the White House's 'Teaser-Freezer' Plan -- Among the terms economists like to use is the phrase “unintended consequences” -- and there are plenty of them in the so-called “teaser-freezer” plan unveiled Thursday by President Bush (as an uncomfortable-looking Treasury Secretary Hank Paulson looked on).

For the record, the plan covers borrowers with adjustable-rate mortgages scheduled to adjust between January 2008 and July 2010 who meet the following threshold tests:

  • The loans must have been originated between January 2005 and July 2007;
  • The scheduled interest rate adjustment will increase the monthly loan payment by at least 10%;
  • The loan must be current, that is the borrower isn’t behind in any payments on the loan, plus the borrower cannot have been 60 days late more than once since the mortgage was first made;
  • The borrower’s credit score must be below 660 (which is considered a borderline “good” score) and must not have improved by more than 10% since the mortgage loan was first made; and
  • The borrower’s equity in the home has to be no more than 3%.
In an interesting twist, the loan itself has to have been sold by the original lender and packaged into a security that was then sold to investors. Loans still owned by the original lender are typically easier to refinance, since the lender can set its own rules for refinance transactions. One of the sticking points Bush, Paulson and company had to deal with was getting the faceless owners of the loans to accept a lower interest rate – and thus income – than they had anticipated when they invested in the loans.

The architects of the plan estimate 1.2 million are generally eligible, meeting the origination date and adjustment date thresholds, but only half of them will meet the other tests.

That’s where the first “unintended consequence” kicks in. [...]
Liz Moyer / Forbes:
Bush's Bad Mortgage Medicine -- The expected backlash to the plan started immediately after the Administration announced it. Housing advocates said it leaves millions of struggling borrowers at risk of foreclosure. Others decried it as a shameful bailout of irresponsible lenders and borrowers.

"President Bush's plan may make good politics, but it is terrible economics," said Edward Ketz, an accounting professor at Penn State University. "It punishes those who have acted prudently and rewards bad decisions by homeowners who bought what they could not afford. It gives incentives for future homebuyers to act rashly, because they may believe Washington will rescue them from error and greed."

Perhaps more significantly, Ketz and others warn the plan could further choke off the credit markets and result in higher mortgage rates in the long run. [...]
New York Mortgage Bank Says Bush Plan Misses The Mark And Leaves Thousands of Borrowers... -- Thousands of mortgage borrowers have been overlooked by President Bush's sub-prime mortgage relief plan, announced today, and will lose their homes as a result - according to Gregg Marcus, Managing Director of Somerset Mortgage Bankers, one of Long Island's oldest and fastest growing lenders. He says the plan is simply "a drop in the bucket."

Marcus believes that the Bush solution, which will freeze interest rates for five years to certain types of loans made at the start of 2005 through July 30th of this year with rates that are scheduled to raise between January 1, 2008 and July 31, 2010, does nothing for borrowers who have "refinanced" over the past two years and especially for those who never factored in their new payment. [...]

Rate freeze called too little, too much -- Admitting that the proposal was not "a silver bullet," Treasury Secretary Henry Paulson announced that the administration had brokered a deal with mortgage industry representatives to freeze interest rates for five years on adjustable-rate mortgages for some subprime borrowers who have damaged credit. The proposal would apply to some 1.2 million homeowners whose mortgages will reset higher in the next two years.

Some representatives of the housing industry praised the plan. "It's not a panacea but it's a step in the right direction," said Jerry Howard, chief executive of the National Association of Home Builders in Washington. "From our perspective, keeping 1.2 million homes off the inventory list [of homes for sale] is a major accomplishment." However, critics bashed the move as government meddling in the free market.

A group of 61 economists sent a letter to Congress on Thursday arguing that the freeze represents federal intervention.

"This letter should give policymakers pause in their rush to pass bailout schemes for the real estate market," said former Sen. Dick Armey, who now chairs FreedomWorks, a Washington grass-roots organization that put together the letter and pushes for less government involvement in private life. [...]
Caroline Salas and Jody Shenn / Bloomberg:
Bush's Subprime Mortgage Freeze Stymies Bond Market (Update4) -- President George W. Bush's plan to freeze interest rates on some subprime mortgages may prove to be a cure that breeds another disease.

"If the government goes in and changes contracts it will definitely have a chilling effect on the securitization of mortgages,'' said Milton Ezrati, senior economist and market strategist at Lord Abbett & Co. in Jersey City, New Jersey, which oversees $120 billion in assets. "When the government comes in and says you have contracted to have this arrangement and you can no longer have it, I think it opens the door for lawsuits.'' [...]
Kathleen Pender / San Francisco Chronicle:
Loan bailout is not likely to help many homeowners -- The subprime rate freeze plan announced by the Bush administration last week was clearly designed to win votes. I just wonder whose.

The number of people who will meet all the complicated criteria necessary to qualify for a five-year rate freeze on their subprime adjustable-rate mortgage is relatively small. Estimates range from fewer than 100,000 to 600,000 nationwide. To put that in perspective, Oakland has about 400,000 people.

The percentage of people opposed to the plan appears to be high, based on informal polls.

Business news site CNBC.com asked visitors, "Is the Bush administration's idea to freeze mortgage rates necessary to insulate the economy from the subprime crisis?" Only 13 percent said "Yes - The danger to home values and the economy warrants government intervention," while 81 percent said "No - the marketplace should be left to resolve the issues on its own." That's not surprising coming from a business audience. The rest said it's not yet clear.

The Chronicle's Web site, SFGate.com, asked, "What do you think of the mortgage-rate freeze plan?" Of the 1,758 responses, 8 percent said it's good because it keeps people in their houses, and 89 percent said it's bad because it bails out reckless banks and borrowers. The rest said, "Only a fraction qualify, why not me?"

Based on flood of e-mails I've gotten in response to my Thursday column on the plan, some people believe the government should not be meddling in contracts between borrowers and lenders. [...]
Jonathan Ratner / Economy, Market Cal / National Post [Canada]:
Gartman attacks Bush's mortgage plan -- As the details of President Bush’s subprime mortgage bail out plan emerge, Dennis Gartman says his support for the administration has fallen to zero. In fact, regardless of what happens going forward and his backing in the past, Mr. Gartman doesn’t think his support can be rekindled.

The author of The Gartman Letter writes that there is a unbridgeable gap between his commitment to free and transparent markets and the Bush administration’s support of reckless spending and now wasteful consumer policies.

He says the administration move to force banks to accept its decision to freeze the ‘teaser rates’ on mortgages will lead to a “tsunami-like” torrent of lawsuits. [...]
Matthew Blake / Nation:
Heck of a Job! Bush's Mortgage Helpline Is Working Now

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